HDFC Credila Acquisition: One of a kind deal for the HDFC group

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It was a good Monday night for the HDFC group, with the sale of HDFC Credila – the education group’s loan business primarily focused on overseas lending – closing at ₹9,060 crore or roughly $1.1 billion. Baring EQT and ChrysCapital have jointly acquired a 90 percent stake In the company is likely to be a deal Closed within 15 business dayssubject to the conditions.

The deal is up to 3.7x the FY23 booking price, which is very similar to the last big deal in the NBFC space — Poonawalla Housing and TBG Capital. But the interesting part is the kind of dimensions it has taken since the deal was conceptualised.

back story

On April 4, 2022 when Merger of HDFC Limited and HDFC Bank There have been many questions raised about the future of the subsidiaries of both lenders. a few days later,Business line I mentioned that a deal could be in the works soon at HDFC Credila; A relatively new addition to the HDFC family.

But it was more of a sale of small stakes, and it wasn’t thought at the time whether or not owning HDFC Credila could be a big deal for a merger. With the principal approval coming from RBI in July 2022, the time has come for HDFC and HDFC Bank to make firm decisions about Credila’s future after the mega merger.

The ownership of the entity involved in the education loan business must be reduced to 10 percent or less within two years of the merger, and according to the sources, this was a ‘precondition’ or mandatory requirement for the merger to get a regulatory move forward.

Baring entry

This was also when Baring EQT was looking for opportunities in the non-banking field. Since Baring merged with EQT for its Asian funds in October 2022, the PE giant has been raging to write big checks.

Presumably, another education loan company was also on hiatus at the time, but with Baring’s mandate to strike a “grand bargain”, Credella suited their circumstances. By then, the education loan market was starting to see a lot of momentum. The demand for overseas loans has been increasing after the pandemic.

For Baring, the education sector has long been a major deployment area, even globally.

at that time, HDFC and HDFC Bank A decision is also made on what evaluations they should ask Credila. Anything over a billion dollar check.

Thus began the talks between PE Home and the HDFC Group.

extended conversations

Squeaky clean, decent sized, a loan book of Rs 15,298 crore, and a Grade A AAA rating (thanks to HDFC pedigree) have allowed the lender to control rates and premium in the market. At first glance it seemed a good idea to freeze the group with an expected valuation of between 4 and 4.5 times the reservation price; That’s at least $1.5 billion of consideration. But gradually, this became a difficult request.

It has been questioned whether the company will continue to use capital at low costs, which is the important moat. “We saw what happened with Gruh Finance. The moment I came out of the HDFC fold, the ratings suffered and it wasn’t business as usual,” said NBFC’s CEO.

Normally, PEs are not rated and since April 2023 Crisil has placed HDFC Credila “on watch” due to the deal. We’ll have to see how new Credila owners will be assessed by the ratings agencies, although for the time being, from threads of past experience, a ratings downgrade of at least a notch seems imminent.

“Bondholders may also expect HDFC to prepay their bonds given their investment constraints due to any rating change, which could in turn increase the company’s immediate funding requirements,” said one person familiar with the matter. This is probably why the ‘subscription’ amount of around Rs 2,000 crore is being injected into the company by private equity investors. However, there is a possibility that Credila’s bond yields will increase, (even if the AAA rating doesn’t change in the near term) because it may not have the backing of HDFC.

conclusion

These were questions on Baring’s end as well, hence the reluctance to close the deal at big ratings. “Credella was always a great asset to look at, but the required figure was losing the deal out of pocket,” said one person familiar with the negotiations. At this point, Baring began looking for other NBFCs.

But somewhere along the way ChrysCapital came into the picture and the two decided to join hands. However, even with a partner entering, there was no intention of paying top dollar, which explains why the signing of the deal was extended and constantly discussed.

In the end, someone had to give in and with a bigger mandate in hand, HDFC seems content even if the coin doesn’t match its previous demand. But with the option to keep a 10 percent stake for two years after the change of ownership and a seat on the board, there’s still plenty of upside potential. What if Credella in her new avatar is ready to go public in a few years? This is a good chance to take it.