MUMBAI: Dewan Housing Finance Ltd (DHFL) created a ripple in the debt markets, and its own share took a beating in the equity markets this week, as it skipped interest payments due on some Non-Convertible Debentures (NCDs) on June 4.
Rating agencies took note of the NCD payment news and downgraded its Commercial Paper. Foreign brokerage CLSA put out a note, analysing if there is contagion risk. JP Morgan’s head of emerging markets research told a television channel that it is an insolvency risk that required attention.
DHFL, beset with troubles ever since September sell-off of a debt paper held by a mutual fund and eventual crash in share prices, has struggled to allay fears over its financial position.
On Wednesday, it issued a statement saying that the credit rating downgrade was “extremely surprising as the company has been making, and continues to make, substantial efforts in ensuring no defaults on any bonds, (and) repayment of its financial obligations”.
Late on Friday, DHFL said it had made interest payments of Rs 59.74 crore out of Rs 961.95 crore due, and in another case, interest and principal worth Rs 200 crore. Since September, DHFL has repaid close to Rs 40,000 crore in financial obligations, as per the press release.
Despite strong messaging from the company and the steps it had taken to sell-off some of its subsidiaries to raise money, the markets are edgy. The worry and fear of contagion stem from the fact that it is sitting on borrowings of over Rs 1 lakh crore.
“Mutual funds (Rs 50bn in exposure, 40bps of debt AUM) will take a 75% haircut right away. Banks may also see MTM losses on bond exposure (12% of their total) but loan provisioning (in the case of default) will be more gradual. This default could also accentuate contagion risk in the financial sector (in the backdrop of IL&FS’ default last year) leading to higher costs and the polarisation of funds to better-rated NBFCs,” CLSA said.
The RBI, at its recent credit policy meet, did not make any statement on specifics of dealing with the NBFC sector. The risk of contagion in case of the default is making market participants seek RBI intervention and liquidity support.
Mutual funds had disclosed the portfolios on interest default and many of them had marked down Net Asset Values from 75 per cent to 100 per cent. Tata Mutual Fund said it will keep DHFL exposure in a segregated portfolio as per the recent SEBI guidelines.
Markets are going to be on the edge of following the payment schedules closely.
Markets fret over DHFL’s pile of borrowings
Dewan Housing Finance Ltd (DHFL) is sitting on borrowings of over I1 lakh crore. Estimates show that out of the total exposure of DHFL, public sector banks have Rs 42,000 crore; private banks Rs 8000 crore; mutual funds Rs 5,200 crore; and insurance, pension funds, etc, around Rs 30,000 crore.