FREE

Event update: Financials - DHFL default negative for NBFCs and banks

• DHFL missed payments on NCDs that were due yesterday. (We have been highlighting the risk of DHFL default for some time now). This is a default.
• The total repayment due was Rs11.6bn. (including Rs4bn of scheduled NCD principal repayment, interest payments and exercise of a put option on another bond)
• DHFL has said that it will make some repayments on Thursday and the balance after a week.
• The company was expecting proceeds from loan sell-downs which did not come through, hence the delay in payments.

DHFL has communicated that the delay in payments cannot be termed as a default because they will pay within the “7-day grace period”. Our discussions with bond market participants confirm that there is no such thing as a 7 day grace period, it is indeed a default. Most DHFL bond documents carry this statement: “The description below is indicative and a complete list of events of default and its consequences will be specified in the Debenture Trust Deed. Default is committed in payment of the principal amount of the NCDs on the due date(s); and Default is committed in payment of any interest on the NCDs on the due date(s).”

MFs will have to mark down immediately: Based on AMFI guidelines, mutual funds will have to mark down all DHFL secured instruments (NCDs) by 75% and unsecured instruments (CPs) by 100% immediately. One mutual fund has already marked down NAV. Banks will also have MTM losses but we are not sure of the benchmark.

Impact on financials: This event of a technical default by DHFL is highly negative for banks, NBFCs and bonds. Banks will have to mark down bonds and based on the 90-day default norm classify loans as NPL or standard. It is important to note that irrespective of the accounting treatment, the economic loss will be the same for banks and mutual funds. Also if INDAS was applicable to banks, they would have to take a substantial haircut of 70-75%on DHFL’s secured exposure, similar to the write-down for MFs.

NBFCs will face the rub off impact of the DHFL default. Liquidity will likely become tight again for NBFCs.

State owned banks and YES Bank have big exposures to DHFL. NCD filings of DHFL show that IIB also has a large exposure of 10bn plus to DHFL but IIB has explained that it is much lower now.  Banks have exposures to DHFL through direct loans to DHFL, NCDs and loans sold down by Dewan. Union Bank is the lead bank for DHFL though its exposure is lower than many other banks. The DHFL default may have a negative impact on YES Bank’s fund raising plans.

How will DHFL honour payments in the grace period? – Through securitizing two corporate loans at a huge haircut:  According to a rating rationale on Brickworks website, DHFL plans to securitize two developer loans to raise Rs9bn. While the principal value of the loans is Rs20bn, the value of the PTCs / sell down will be Rs9bn and Rs11bn will be the credit enhancements offered by DHFL. The two corporate loans that will likely be sold down belong to Amaryllis Realtors LLP and Gulmarg Realtors LLP. The loans were part of a tri-partite agreement with Oberoi Realty Ltd., which used the funds to develop a residential and commercial property in Worli (Three Sixty West). That DHFL had to offer a huge credit enhancement for a loan involving the highly rated Oberoi tag shows the severe liquidity crunch at DHFL. The funds raised through the securitization will be used to honour the repayments that were due today. This transaction is not yet completed.

The credit enhancement of Rs11bn in this developer loan securitization originated by DHFL implies a haircut of 55% which is huge especially for a name as good as Oberoi. If this haircut is an indicator, we believe it will be very difficult for DHFL to sell down its corporate loans or find a buyer for its wholesale business.

  

Stake sale proceeds from Aadhar will also be available on Monday: According to a CNBC report, proceeds of the Aadhar stake sale will be available to DHFL on June 10. Blackstone agreed to buy DHFL’s and DHFL’s promoter’s stake in Aadhar Housing Finance for Rs27bn in early Feb. NHB has approved this deal on May 8. 

Will the government / RBI bail out: From various media interviews, we gather that the government and RBI are not in favour of bailing out any private NBFC at the expense of taxpayers’ funds.

Credit policy will be important: What measures the RBI takes to ensure good liquidity in the system in the midst of this default will now be the key monitorable. RBI’s response to the NBFC crisis becomes a more important monitorable in the credit policy announcement on June 6 than a rate cut.

Rating agencies have been a bit lenient: Rating agencies have not done any downgrades after DHFL put a temporary ban on pre-mature withdrawal of deposits. They have also not reacted to DHFL missing the May- end deadline of finding strategic investors. We believe today’s event is significant and could trigger a rating downgrade. The last set of downgrades for DHFL was in mid-May.