Housing Finance Companies (HFCs) are likely to benefit from lower borrowing costs after the National Housing Bank (NHB) agreed to provide Partial Credit Enhancement (PCE) for bonds they issue. The move aims to help HFCs secure funding at better rates and pass on the benefits to borrowers, especially in the affordable housing sector. In a letter dated October 6, NHB informed HFCs it would offer PCE on secured non-convertible debentures (NCDs), with the goal of helping these firms diversify their funding sources and reduce over-dependence on banks. This facility will be available only to non-deposit taking HFCs with assets of at least ?1,000 crore. Eligible companies must also have a minimum 'A+' credit rating from two rating agencies, and keep gross NPAs below 2.5% and net NPAs below 1.5%. To make bonds attractive to investors, NHB stressed the importance of high credit ratings. Many HFCs struggle to issue bonds due to lower ratings caused by factors such as asset-liability mismatches.
NHB will charge an annual PCE fee based on the bond's credit rating before enhancement:
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25 bps for AA+,
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50 bps for AA/AA-,
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100 bps for A+.
An additional 2% fee will apply if the issuer defaults or is downgraded.
The enhancement will cover up to 50% of the bond issue, with a minimum size of ?50 crore. The bonds must have a tenure of 3 to 5 years, and the proceeds can only be used to refinance existing debt. HFCs must also submit a certificate from their statutory auditor within seven days of receiving funds. The PCE will be provided as an irrevocable contingent line of credit, which is expected to boost the external credit rating of the bonds and help HFCs raise funds at lower interest rates.
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