Bond Investors, Bankers Keep Wary Eye On DHFL After Rating Downgrade To ‘Default’

Bond market investors and banks are bracing for another hit, this time from Dewan Housing Finance Ltd.

The housing finance company, with a track record of over three decades, has borrowings of just over Rs 1 lakh crore from the bond markets, banks and depositors, according to an investor presentation dated Feb.11, 2019. Nearly 47 percent of these borrowings are from the bond markets, while 38 percent are from banks.

On Thursday, Care Ratings downgraded all of DHFL’s borrowings to ‘default’ after it missed interest payments on some instruments. While DHFL has so far only missed interest payments on a small subset of non-convertible debentures, rating agencies fear that the non-bank lender will not have sufficient liquidity to meet repayment of bank and bond dues in a timely manner.

To be sure, the company is in talks to bring in a strategic investor and sell-down developer loans, which could help it generate liquidity and regularise payment of dues.

Upcoming Payments On Bonds

According to data available on Bloomberg, DHFL’s bond and bank loan payments stretch out till 2023, with the highest proportion of dues coming up in 2021.

In 2019, the company has over Rs 7800 crore worth of principal and interest payments on bonds and non-convertible debentures coming due in 2019. Of this, Rs 5,479 crore is in the form of redemptions.

A majority of redemptions come up in the quarter ending December 31, 2019 at around Rs 7040 crore. Around Rs 4800 crore worth of bond redemptions will take place in September, according to Bloomberg.

The holders of this debt range from treasury departments of banks and NBFCs to mutual funds and retail investors.

Since September, DHFL has found it near impossible to raise fresh funding from the debt markets. It has relied on securitisation of retail loans and bank lines of credit. With the company now missing interest payments and rating agencies downgrading short-term commercial paper borrowings, hope of refinancing existing debt via fresh market borrowings is dim.

Arvind Chari, head of fixed income and alternatives at Quantum Advisors, said the company has not tapped the domestic debt markets since the start of 2019 as the supply of funds has dried up, particularly from debt funds. The company will have to continue raising funds through the securitisation route to repay their debt, Chari told BloombergQuint.

Bank Exposure To DHFL

Among banks, Yes Bank Ltd, Bank of India, Bank of Baroda and Dena Bank have the largest exposures to DHFL as a percentage of their loan books, shows a Credit Suisse report dated April 30.

DHFL’s total bank loans outstanding are at about Rs 38,000 crore, shows the company’s annual report.

Highlighting the incremental stress coming from four large groups — the Anil Ambani Group, DHFL, the Essel Group and IL&FS — Credit Suisse analysts pointed out that the bank exposure to these firms ranges from 1-6 percent of the loan book of some of these banks.

According to the chief of a large public sector bank, the promoters of DHFL have assured lenders that the delay in paying interest on June 4 was the result of a temporary cash flow issue, which is likely to be corrected soon. The company is attempting to sell 9.15 percent stake in its affordable housing finance business Aadhar Housing Finance Ltd to Blackstone, which is likely to take care of its immediate dues, the banker said speaking on conditions of anonymity.

Bankers are mindful of the liquidity issues at DHFL, but any action against the borrower will only come after they are convinced that the problems cannot be handled, the banker added.

According to CLSA, banks have funded about Rs 50,000 crore of DHLF’s Rs 1 lakh crore borrowing from the bond market and through loans. Additionally, banks may have bought out the company’s loan portfolio through securitisation deals.

“Banks will also face (like mutual funds and insurance companies) similar MTM risks on bond-books, but for loans they will follow 90 days past overdue for NPLs and time-based provisioning that starts from 15 percent,” CLSA said in its report on Thursday.