86,000 bondholders may be key to DHFL’s successful resolution

Seven state-run lenders to DHFL, including State Bank of India and Union Bank of India, met 300 institutional bondholders comprising mutual funds, provident funds and pension funds on Thursday to explore options of working together to restructure DHFL’s ₹1 trillion debt. DHFL’s chairman Kapil Wadhawan was also part of the meeting.

“We are looking at restructuring the company as a going concern. Lenders will work with NCD holders, shoulder-to-shoulder, to realize the maximum value," said a senior banker, one of the three cited above, on the condition of anonymity. “It’s not mandatory on the part of NCD holders to sign the ICA."

Of DHFL’s total ₹1 trillion debt as of February, ₹38,000 crore has been borrowed from banks. The remaining amount was raised by selling debt securities. On 5 July, close to 30 banks signed the ICA to restructure the debt of the home financier.

The decision to include these investors as part of ICA is mainly to prevent NCD holders from moving the Debt Recovery Tribunal to recover outstanding dues, stalling the restructuring process. Currently, financial institutions cannot be referred to the National Company’s Law Tribunal for insolvency proceedings.

The Indian Banks’ Association, on behalf of lenders, has already written to the Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority and Insurance Regulatory and Development Authority of India to permit investors to participate in the ICA. Under the Reserve Bank of India’s guidelines on resolution of stressed assets released on 7 June, only banks and non-banking financial companies are allowed to be part of the ICA.

However, in the case of DHFL, as the number of debenture holders is large, lenders say that the debenture trustees can seek permission from these holders before signing the ICA. This involves going through a voting process and giving the holders 21 days’ time to exercise their vote.

Catalyst Trusteeship Ltd and IDBI Trusteeship Services Ltd act as the debenture trustees for the NCDs issued by the housing company.

“This is the first time that NCD holders could be part of a restructuring process. There are not too many cases where such a large portion of debt is being held by NCD holders," said the second banker, also requesting anonymity. “DRT is equipped to handle these cases. Hence it’s necessary that it goes through restructuring," he added.

Meanwhile, DHFL will submit the resolution plan next week after a board meeting scheduled for 13 July.

The restructuring plan, which is being prepared under RBI’s 7 June circular, could include extension of the tenure of loans, conversion of debt into equity, infusion of fresh working capital and induction of a new management team and financial investors.

Currently, DHFL is a “special mention account-zero", indicating an asset where interest and principal is not overdue for more than 30 days and the account exhibits signs of incipient stress. Lenders have to ensure the restructuring is completed by end-September in order to avoid the account being classified as non-performing.

Under RBI’s new framework, lenders have 30 days to decide on a resolution plan. The decision of lenders who constitute 75% by value of total outstanding facilities (fund-based as well non-fund based) and 60% by number shall be binding on all other lenders.

DHFL’s consortium of lenders also includes Axis Bank, HDFC Bank and ICICI Bank. SBI has the largest exposure of around ₹10,000 crore.

Over the past few months, DHFL has sold retail loans worth ₹30,000 crore. It has also sold several of its strategic assets, including affordable housing arm Aadhar Housing Finance Ltd, educational loan business Avanse and DHFL Pramerica Asset Managers. In January, DHFL sold wholesale loans worth ₹1,375 crore to alternative investment management fund Oaktree Capital, which buys distressed loan portfolios at a discount.