The time is right for private equity funds to invest in NBFCs as valuation expectations have moderated considerably after the IL&FS crisis prompted banks and mutual funds to go into an risk-averse mode
Mumbai:Non-banking finance companies (NBFCs) and home financiers are approaching private equity (PE) funds and overseas debt markets to raise long-term capital because of a liquidity crunch and rising cost of capital in India. Industry watchers say the current situation is opportune for PE funds looking to invest in NBFCs since valuation expectations for the sector as a whole have moderated considerably after the IL&FS crisis prompted banks and mutual funds, two major sources of funding for NBFCs, to go into a risk-averse mode.
Liquidity in the banking system has turned from a surplus of ₹ 20,200 crore in the beginning of August to a deficit of ₹ 1.16 trillion at the end of October, according to Bloomberg data.
Consequently, short-term commercial paper (CP) rates have gone up sharply. “In the few months, on account of Reserve Bank of India hiking the repo rate by 50 basis points and tight liquidity conditions, CP rates have shot up by 1-1.5%," said Anil Gupta, vice-president and sector head at ICRA Ltd.
“One can expect many more such deals going forward," said Mahesh Singhi, founder and managing director of investment bank Singhi Advisors. “The situation will differ on a case-to-case basis. Stronger NBFCs may still be able to raise money from the debt markets but the weaker ones may have to raise equity at discounted valuations."
Even as concerns around asset-liability mismatches have surfaced after the IL&FS crisis, some home financiers are exploring external commercial borrowings (ECBs).
“ECBs as a source of funding have become extremely significant right now, considering NBFC-HFCs need to reduce their short-term liabilities," Monu Ratra, chief executive at IIFL Home Finance said. Ratra, however, said the credit rating of the firms will be crucial on who will be able to raise money through this route.
According to bankers and NBFCs, the cost of raising funds for AAA rated NBFCs through ECBs for a five-year period is under 9%, inclusive of the hedging cost. Whereas, at present, some of the top-rated HFCs are able to raise short-term CP money at interest rates raining between 8.1% and 8.9%.
“ECBs allow you to raise long-term funds and if a firm can raise that money, it is a good route to go for. Market has been concerned about asset-liability mismatches (ALM) and ECBs take care of the ALM issues. In a rising interest rate scenario, if the ECB fund-raise is fully hedged then the firm is locked in at that rate for five years, hence hedged against rising rates," said Kapish Jain, chief financial officer at PNB Housing.