2 July 2019: The consortium of lenders to Dewan Housing Finance (DHFL) have decided to sign an inter-creditor agreement (ICA) by the end of this week as the first step towards resolution of the account following a meeting on Monday.
The exposure of banks is close to Rs 45,000 crore, which is nearly half the company’s total outstanding of close to Rs 1 lakh crore. State Bank of India (SBI) is the largest lender to DHFL, with an exposure of nearly Rs 10,000 crore.
At Monday’s meeting, which was called by Union Bank of India, lenders decided that June 29 would be the ‘reference date’ for DHFL. This essentially means banks have 30 days from then to sign the ICA and decide on the nature and manner of implementation of a resolution plan (RP). Bankers with exposure to the account are expected to sign the ICA by July 5.
“Earlier defaults on the facilities aside, there was a fresh default from DHFL to one of the banks within the consortium, which is why June 29 was decided as the reference date for the account. Nothing concrete on the potential resolution plan was discussed at the meeting. That will be taken up once all banks have signed on,” a banker aware of the developments told FE.
Further discussions on a resolution plan will be held at future meetings, the bankers said. Among the options available to lenders is securitisation of DHFL’s debt.
The RBI’s June 7 circular on ‘Prudential Framework for Resolution of Stressed Assets’ requires bankers to initiate the process of implementing an RP when the borrower is reported to be in default by any of its lenders. The circular mandates that all lenders with exposure to a particular entity enter into an inter-creditor agreement (ICA) during the ‘review period’ to provide for ground rules for finalisation and implementation of the RP.
The circular directs lenders to undertake a prima facie review of the borrower account within thirty days from a default, referred to within the circular as ‘review period’, during which lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc.
The lenders may also choose to initiate legal proceedings for insolvency or recovery during this period. The lenders met after the housing finance company defaulted on some of its debt obligations, including earlier last week when it defaulted to a clutch of 12 lenders, managing to make only 40% payment to on unsecured commercial paper or Rs 150 crore out of the outstanding aggregate amount of Rs 375 crore.
Earlier last month, the housing finance company also failed to make interest payment of Rs 850 crore on its non-convertible debentures (NCDs), following which its credit rating was downgraded to default by rating agencies.
The consortium of banks is yet to classify the exposure as NPA. However, their exposure of close to Rs 45,000 crore, about half the company’s total outstanding of close to Rs 1 lakh crore, appears to be in trouble. SBI is the largest lender to DHFL with an exposure of nearly Rs 10,000 crore, the bank told its shareholders during its annual general meeting.
In a note to exchanges on occasion of the latest default, the company said: “Without any recourse to fresh debt funding, a situation exacerbated by multiple rating downgrades, the Company met all its financial obligations through a combination of internal accruals, sell down of its loan assets and monetisation of non-core assets.”
It further stated, “Pursuant to the downgrade by rating agencies expecting a default for the Commercial Papers (CP) much before they had fallen due, the mutual funds had already taken a 100% markdown on their CP investments…The Company is already in the process of selling down its loan assets including wholesale project loans to make good all its obligations and maintain its 100% commitment to all its creditors as it has done since the liquidity crisis started in September 2018.” Only last week, the mortgage firm announced it was deferring the announcement of financial results for the March quarter to 13 July citing ‘certain unforeseen operational engagements, including non-availability of a few directors’. The RBI’s latest Financial Stability Report noted that the failure of a large non-banking financial company could be as bad for the ecosystem as the failure of a big bank.
DHFL has raised funds over the past few months – securitising retail loans worth Rs 30,000 crore. According to reports, the lender also sold Rs 1,375 crore worth of wholesale loans to foreign investment management firm Oaktree, which buys distressed debt at a discount.