It was a good Monday night for the HDFC group, with the sale of HDFC Credila--the group’s education loans business primarily focused on overseas lending--concluding at ₹9,060 crore or roughly $1.1 billion. Baring EQT and ChrysCapital jointly picked up a 90 per cent stake in the company and the deal is likely to be closed within 15 business days, subject to conditions.

The deal works out to 3.7x FY23 price to book, very similar to the last big transaction in the NBFC space - Poonawalla Housing and TPG Capital. The interesting part, though, is the kind of dimensions it has taken since the deal was conceptualised.

The back story

On April 4, 2022 when the merger of HDFC Limited and HDFC Bank was announced, there were many questions raised about the future of the subsidiaries of both lenders. A few days later,businessline reported that a deal could soon be in the making at HDFC Credila; a relatively new addition to the HDFC family.

But it was more of a small stake sale, and it wasn’t thought back then whether having or not having HDFC Credila could be a big deal for the merger. As the in-principal approval came through from the RBI in July 2022, it was time for HDFC and HDFC Bank to take firm decisions on Credila’s future post the mega-merger.

The combined entity’s ownership in the education loans business should be brought down to 10 per cent or lower within two years of the merger and according to sources, this was a ‘condition precedent’ or a mandatory clause for the merger to get the regulatory go ahead.

Baring’s entry

This was also when Baring EQT was scouting for opportunities in the non-bank space. Ever since Baring’s merger with EQT for its Asian funds took shape in October 2022, the PE giant has been raging to write fat cheques.

Presumably, another education loan company was also on the block back then, but with Baring’s mandate to strike a ‘big deal’, Credila suited their conditions. By then, the education loans market was starting to see a lot of traction. Demand for overseas loans was gathering moss, post the pandemic.

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

By then, HDFC and HDFC Bank were also decided on the valuations they should ask for Credila. Anything upwards of a billion-dollar cheque.

Thus started the talks between the PE major and the HDFC group.

Stretched talks

Squeaky clean, decently sized ₹15,298 crore-loan book and top-notch AAA rating (thanks to the HDFC pedigree) allowed the lender to command the pricing and premium in the market. At first glance, it seemed good for the group to freeze on an expected valuation of 4 – 4.5x price to book; that’s at least $1.5 billion of consideration. But gradually, this was becoming a tough ask.

Whether the business will continue to tap capital at low costs, which is its critical moat, was getting questioned. “We saw what happened with Gruh Finance. The moment it went out of HDFC’s fold, ratings suffered and it wasn’t business as usual,” said a CEO of an NBFC.

Typically, PEs are unrated and since April 2023 Crisil has placed HDFC Credila’s rating ‘under watch’ owing to the deal. It needs to be seen how the new owners of Credila will be assessed by rating agencies, though for now, threading by past experiences, a downgrade by at least a notch seems imminent.  

“Bondholders may also expect HDFC to prepay their bonds given their investments restrictions due to any rating change, which could in turn increase immediate funding requirements for the company,” said a person aware of matter. This probably is why a ‘subscription’ amount of about ₹2,000 crore is being infused into the company by the PE investors. Yet, there is a likelihood of the bond yields increasing for Credila, (even if the AAA rating is unchanged in the near-term) as it may no longer enjoy HDFC backing.

The closing

These were questions at Baring’s end too and hence the reluctance to consummate the deal at fat valuations. “Credila was always a great asset to look at, but the number that was demanded was blowing the deal out of the pocket,” said a person familiar with the negotiations. At this stage, Baring started looking into other NBFCs.

But somewhere along the way ChrysCapital came into the picture and the two decided to join hands. That said, even with a partner coming in, there was no intention of paying top dollar, which explains why the sign off on the deal was stretched and constantly debated.

In the end, someone had to give in and with a larger mandate on hand, HDFC seems to have been satisfied even if the currency didn’t match its earlier ask. But with the option to hold 10 per cent stake for two years post the ownership change and a seat on the board, there’s still a lot of upside potential. What if Credila in its new avatar becomes IPO ready in a few years? That is a good chance to take.

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