This downgrade by a couple of notches follows the reported default by the non-banking financial company (NBFC) in paying interest on over ₹900 crore of bonds on 4 June. A DHFL official who did not wish to be named said that as per the trust deed, in the event that payment of interest on the NCDs is not met on the due date, there is a cure period of seven working days to meet the obligation.
The official added that in case the non-payment continues post that cure period only then the same shall constitute an event of default.
“The downgrade reflects delays in debt servicing by DHFL on some of its non-convertible debentures (NCDs) — not rated by CRISIL — because of inadequate liquidity. The payments were due on 4 June," said Crisil. On Wednesday, rating agency Icra also cut its rating on the company's paper to D from A4, implying that the company was in default or expected to be in default soon, Reuters reported. This was Icra's fourth rating cut on the company's paper this year.
According to a statement from the rating agency, DHFL has ₹850 crore of outstanding commercial paper (CPs) of which ₹750 crore is due in June 2019. The first CP maturity is on 7 June and with liquidity inadequate as on date to service debt and visibility very low on timely fund raising, Crisil said it expects the CP to be in default on maturity.
Crisil said on Wednesday that the rating action is based on an analysis of the NBFC’s modest capital position and earnings. It said that the reported net worth and capital adequacy ratio were ₹10,750 crore and 17.74%, respectively, as on 31 December, 2018. Moreover, its return on managed assets, though stable at 1.3% during the first nine months of fiscal 2019, was lower than that of peers, primarily because of intense competition resulting in low spreads, and high operating expenses on account of large branch network and small ticket size of loans, said Crisil.
On 11 May, Crisil had downgraded its rating on DHFL’s commercial paper to A4+ from A3+, citing more-than-expected reduction in the company's liquidity because of further delays in fund raising from sell down of project finance loans and lower inflows from securitisation of non-housing loans.
Mint reported on Wednesday that while it is not clear if the delay was related to debt owed to mutual funds, it has affected all debt issued by the company due to valuation norms that require funds to take write-downs on the occurrence of such an event. The Mint report added that mutual funds have taken write-downs as per the valuations provided by independent valuation agencies.