15 July 2019: It is ironic that a lender with the safest business of mortgages should become the most unsafe firm for its own investors.
It is no secret that Dewan Housing Finance Corp. Ltd (DHFL) is running out of oxygen to survive and its stock has already collapsed after the company indicated its days could be numbered. “These developments may raise a significant doubt on the ability of the company to continue as a going concern,” said DHFL, citing financial stress and downgrades, besides lack of funding, as factors behind the dire assessment.
What the company needs is funding and it needs it quick.
For that, lenders need to trust DHFL, which they don’t. The delay in publishing unaudited financial results for the March quarter shows that the trust deficit with investors is widening too. The company’s shares fell 29% on Monday after it reported huge losses for Q4.
DHFL’s loan book is in a mess and the surge in gross bad loans to 2.74% of the total loan book is the least of the problems. If one adds developer loans where cheques have not been banked, the stressed asset pool surges to more than 21% of its loan book.
For loans worth ₹20,750 crore, there are gaps in documentation. The company intends to monetize a pile of loans, which according to its estimates are valued around ₹36,000 crore. The fair value erosion is estimated to be ₹3,190 crore by DHFL.
Considering that the regulator highlighted gross divergences in assessing risk and, hence, capital levels, investors don’t believe the judgement of the management any more.
“The numbers are not believable when divergences are being talked about in the case of past numbers,” said an analyst at a global brokerage firm, requesting anonymity.
There are also concerns about DHFL’s pooled loans. The company pooled loans and sold them off to banks in its efforts to raise money. Most of them are said to be of the retail category.
(Graphic: Vipul Sharma/Mint)
But after Brickwork Ratings India Pvt. Ltd downgraded one such pool to “C” from “BBB” in June, a fresh concern now is whether these pools are kosher.
Trust is running low among investors and DHFL has not been able to raise any funds from the bond market, its go-to place up until September last year.
It had to sell stake in two of its group firms to generate money to pay off maturing debt, but a huge mound is still to be paid.
That said, inflows have reduced to a trickle and DHFL defaulted on its interest payments yet again last week.
Some analysts believe that lenders will have to take a haircut of 50-60% as part of any resolution plan.
“The erosion on DHFL shares is testament to the fact that investors don’t expect much. Perhaps some investors are willing to wait a week to see the resolution plan and, if it doesn’t materialise, the company’s life is at stake,” said an analyst on condition of anonymity.
Lenders have given until 25 July to the company to come up with a resolution plan. Will DHFL survive? That would depend on how banks, mutual funds and more than 86,000 bondholders view the plan.