HMDA raises debut bond despite market jitters
Hyderabad Metropolitan Development Authority diversified its debt profile with its debut in the domestic bond market by raising Rs32.79bn (US$348m) from tightly priced long-tenor notes, despite volatility as the Middle East war entered its fifth week.
The statutory urban planning body for the Hyderabad Metropolitan Region in the southern Indian state of Telangana issued the bonds in separately transferable redeemable principal parts format, with maturities ranging from four to 20 years, at 8.7%, payable quarterly.
While the deal fell short of its maximum Rs50bn target, "this is the first time a metropolitan development authority has come to the market with a regular bond backed by a structured payment mechanism", said Anuradha Basumatari, director at India Ratings & Research.
The tenor, one of the longest achieved by a development authority, also helped the issuer diversify its funding base.
“For entities like development authorities, bonds can often be a better route, especially for long-term funding needs," said Rajkiran Rai, managing director at the National Bank for Financing Infrastructure and Development, which bought into the deal.
“Bonds allow issuers to lock in rates for long tenors, whereas loans typically come with periodic resets."
HMDA was able to achieve a tight spread of 116bp over the 20-year government bond benchmark, which was quoted at 7.83% annualised versus the 8.99% annualised payout for HMDA, according to LSEG data.
Volatile market
Jayen Shah, founder of investment banking and corporate advisory firm Mavuca Capital, said the pricing was very competitive despite the market volatility, especially when several AAA rated public sector issuers have withdrawn deals because of higher-than-expected yields.
First-time issuers are required to submit a private placement memorandum on the electronic bidding platform five working days before the issue opens, and a debut issuer that withdraws a deal may not send the right signal, a DCM banker away from the deal said.
India's 10-year benchmark breached the 7% mark on Monday (when the deal was priced) for the first time since July 2024. The benchmark has surged 38bp to 7.035% since the war began on February 28.
Investors expect the conflict to stoke inflation and spur a rate increase by the central bank as early as August if crude prices remain high, as India imports more than 80% of its crude oil requirements.
"The credit for this deal’s success is primarily anchored on the confidence of the specialised long-term infrastructure sector investors and the structure’s robust debt-servicing features," said Shah.
NaBFID and India Infrastructure Finance were among the eight qualified institutional buyers that participated in the deal in large size, according to National Stock Exchange data.
Insurance companies, pension funds and private corporates also subscribed in small amounts. There were five non-qualified institutional buyers as well.
HMDA engaged with long-term infrastructure financiers before the deal was announced.
"The issuers like HMDA typically approach potential investors in advance. We conduct the due diligence, evaluate the structure, and support issuances where the pricing and risk are appropriate,” said Rai at NaBFID.
HMDA was eyeing a base size of Rs30bn with a greenshoe option of Rs19.99bn, as part of a multi-year Rs200bn fundraising programme.
Structuring
India Ratings and Acuite have assigned provisional ratings of AA and AA+ to the notes, which are supported by an unconditional and irrevocable guarantee from the government of Telangana.
The structure is further strengthened by a defined payment mechanism backed by an escrow account, a bond servicing account and a debt service reserve account, along with clearly defined timelines for addressing any shortfalls.
HMDA will route 85% of its core revenues – including development charges, outer ring road impact fees, and income from integrated township Tellapur Technocity – into an escrow structure to service the bonds, while retaining 15% for operational needs, according to India Ratings. Impact fees are a special development charge to recover the infrastructure cost from developers.
The developmental authority's first bond issue widens its funding base beyond loans and paves the way for more such entities to tap the market.
"State governments may periodically transfer land to these authorities to enable them to undertake large projects through land monetisation," said Basumatari.
“When infrastructure like roads and drainage is developed, land valuations increase. Authorities can monetise this through development charges or other fees linked to the projects which gets escrowed," said Rai at NaBFID.
Such structures provide revenue visibility and comfort to investors. “Instead of depending entirely on budgetary support, development authorities can now come to the market with strong revenue models and raise funds independently,” he said.
"Issuers from other cities like Mumbai Metropolitan Region Development Authority, which have been allotted land for infrastructure development, should also explore the bond market route to raise funds," Rai said.
However, it may not be easy for all issuers to replicate this structure.
"Whether this encourages others to come will depend on institutional capacity, willingness, and administrative ability, as it is complex compared to traditional borrowing," Basumatari at India Ratings said.
Also, the key risk remains political. “There is inherent political risk in such infrastructure-linked issuers, as project viability can be affected by changes in government priorities,” a second DCM banker said. “Any project requiring state approvals remains exposed to policy reversals or delays."
Trust Investment Advisors was the sole arranger.