Housing Development Finance Corp., the country’s largest rupee-bond issuer this year, used a so-called total return swap to hedge rate risk on a debt issuance that closed last month, the people said. Asked not to discuss the arrangement. He said the lender was primarily using overnight-index swaps earlier.
The switch to hedging tools comes when markets are hit by a hike in policy rates, with the Reserve Bank India There has been an increase of 140 basis points since May to tackle inflation. The central bank said last week that it would “do whatever it takes” to ease price pressure, though some traders expected it to ease its spirits.
Under interest rate derivatives contracts, banks purchased readily tradable sovereign bonds in their treasury books on behalf of a Mumbai-based financier, and
People said overnight Mibor would pay the rate and a spread for lenders. The spread acted like a fee that HDFC paid to the banks that took the bond position for the financier.
A representative for HDFC declined to comment. The lender’s reliance on overnight-index swaps to manage rate risks had allowed traders to place bets in the market to factor in HDFC’s upcoming hedges, making it costly for the financier to buy the security, people said.
The contract is called a total return swap because it allows the receiver to obtain a return on the underlying asset, in this case a sovereign bond, without having to fund the assets on its balance sheet.
With over 40% of the financier’s $66 billion of borrowings coming from debt securities, managing the potential yield mismatch between the variable-rate loans it offers and the fixed rates at which it borrows is critical for HDFC. Is. The swap agreement makes the liabilities and borrowings variable for HDFC, thereby protecting its borrowing margin.
This will help if policy rates come down during the tenure of HDFC’s bonds. It is not clear on which bonds the mortgage financier hedged the rate risk.
HDFC raised a combined Rs 181.1 billion ($2.3 billion) through three loan offerings last month. Overall, Rs 40 billion was raised in March 2024 at a 7.28% coupon, Rs 31.11 billion in June 2027 through bonds maturing at 7.77% and the remaining at 8% through 10-year offerings.
Not all companies in India use total return swaps to hedge their interest rate risk. This is because some of the lenders are not in business, and hence there is no need to hedge the risk, and also no other shadow financier in the country has a balance sheet that is close in size to HDFC.