CARE Ratings has downgraded ₹1.13 trillion of bonds, loans and fixed deposits of DHFL
Several provident and pension funds are also invested in housing firm Indiabulls Housing Finance
At least 40 pension and provident fund trusts, mainly from the public sector, have a combined exposure of around ₹3,300 crore to troubled Dewan Housing Finance Ltd (DHFL), one of India’s largest housing finance companies that has faced a series of credit rating downgrades.
According to filings with Registrar of Companies, State Bank of India (SBI) employees’ provident fund and pension fund invested ₹75 crore in 2016 and ₹150 crore in 2015 in DHFL.
Most of DHFL’s non-convertible debentures (NCDs) were purchased by government-backed pension, provident fund and gratuity fund trusts of public sector enterprises such as LIC ( ₹850 crore), Hindustan Petroleum Corp. Ltd ( ₹15.15 crore), Indian Oil Corp. Ltd ( ₹64 crore), SBI ( ₹225 crore), Coal Mines trusts ( ₹664.43 crore), New India Assurance Co. Ltd ( ₹20 crore), United Insurance Co. Ltd ( ₹16 crore).
The Central Board of Trustees (Employees’ Provident Fund) also invested ₹750 crore in May 2015 through NCDs. Other investors include Mission of USA Foreign Service National Staff Provident Fund, which holds DHFL papers worth ₹3 crore.
While pension and provident funds regularly invest in debt papers, the case with DHFL could be different. On 14 May, CARE Ratings downgraded ₹1.13 trillion of bonds, loans and fixed deposits of DHFL. The rating agency said DHFL’s liquidity would also be susceptible to any higher-than-anticipated withdrawal of deposits, enforcement of acceleration clauses in some of the NCDs and any higher-than-expected drop in collections from loan assets.
Provident and pension funds also have significant exposure to debt-ridden Infrastructure Leasing and Financial Services Ltd (IL&FS) and its related entities. In a report on 12 April, Business Standard newspaper reported, citing an affidavit filed by IL&FS with the National Company Law Appellate Tribunal, that provident funds and pension funds have an exposure of ₹9,134 crore to IL&FS and its group entities.
“The parent company (the sponsor) of the pension fund trust will be required to compensate the beneficiary pensioners from their own treasury if there is a shortfall in the return due to any credit rating downgrade or inability of the NCD issuer to honour the redemption on the maturity date," said R.V. Verma, former whole-time member of the Pension Fund Regulatory and Development Authority, which regulates pension funds worth ₹4 trillion through the National Pension System.
According to the norms of the Employees’ Provident Fund Organisation (EPFO), provident fund trusts need to pay 8.65% returns to employees. EPFO manages at least ₹11 trillion of funds.
“Pension fund trusts can invest in AA-rated papers or above as per the current regulations," Verma said. “If there is a fall in rating, the total investment in such papers will no longer be bona fide to be in the portfolio of the pensioners’ money. Then this amount needs to be provided for by the parent of the pension trust."
Several provident and pension funds are also invested in another housing finance company, Indiabulls Housing Finance Ltd, which, while not downgraded, saw its long-term debt instruments on rating watch by Crisil on 9 April.
For instance, provident funds and pension funds infused over ₹1,370 crore in Indiabulls Housing Finance between 2014 and 2016 through NCDs. The major chunk of this ( ₹1,000 crore) has come from the Central Board of Trustees of EPFO. The rest are mostly from government-backed pension, provident fund and gratuity fund trusts of public sector enterprises, including provident fund trusts of several public sector enterprises such as HPCL ( ₹5 crore), Food Corporation of India ( ₹8.15 crore), Coal Mines PF ( ₹54 crore), Seamen’s PF ( ₹3 crore) and IOCL PF ( ₹20 crore).
However, the rating and the redemption dates of these papers could not be ascertained. An Indiabulls Housing Finance (IBH) spokesperson said the lender continues to maintain over 30% of its balance sheet in cash and cash equivalents, which are over ₹31,500 crore. “This covers over 120% of all our repayments for the next 12 months without even including repayments that we receive from our borrowers. IBH is well placed with a strong capital adequacy of 26.3%," added the spokesperson.
Sanjay Sinha, founder of investment advisory and portfolio management firm Citrus Advisors, said: “DHFL and Indiabulls can absorb the risks, but smaller HFCs (housing finance companies) cannot. In 2019, there is hardly investment by pension or provident funds in HFCs. This phase will lead to a more prudential long-term strategy change for pension fund trusts. If ₹5,000 crore worth of redemptions from NCDs are coming up in the next one year, companies like DHFL or Indiabulls should be comfortably able to pay the investors (pension and provident fund trusts). They have the means to pay from one bucket to fulfil the need of another bucket."
Emails sent to DHFL remained unanswered till the time of going to press. That apart, Mint sought comments from almost all the provident funds that invested in DHFL, except a few whose details could not be traced. These funds did not respond as well.
“The downward revisions in rating for housing finance companies and NBFCs (non-banking finance companies) will make pension trusts more conservative in their investment approach and are likely to make regulators introduce new sectoral exposure norms for pension money investment firms," said Verma.
EPFO invests the provident fund savings of private sector employees in debt-related and equity instruments. EPFO, along with the exempted firms, is required to invest 20-45% of its incremental corpus in debt-related instruments, including corporate bonds. The minimum rating of these investments is AA.
Exempted firms manage the retirement savings of their employees through their own fund managers, but according to the rules stipulated by EPFO. These firms, unlike EPFO, do not have the authority to seek any prepayment of investments from NBFCs such as DHFL. So if a loss is made on investments in any paper issued by an NBFC, these so-called exempted trusts would be required to compensate on their own and that in turn would hit the treasury of the sponsor firms of these trusts.
On 14 May, NCDs of DHFL had a credit rating of CARE BBB-, lower than the previous rating of CARE A.
On Monday, Bloomberg reported that yields on DHFL’s June 2021 and September 2023 bonds were at record highs of 20.65% and 21.25% respectively, citing data provided by rating company Crisil.
On Tuesday, DHFL halted pre-mature withdrawals of existing deposits to “help reorganise its liability management", though it will honour withdrawals for medical or financial emergencies. It also stopped accepting fresh public deposits and renewals of existing deposits, citing the recent revision of the credit rating of its fixed deposit programme. A drop in credit rating usually renders the underlying debt instrument illiquid, making an exit near impossible for the bond holder.
Rating agencies are worried about the worsening liquidity at the housing financier and its ability to repay debt papers upwards of ₹8,000 crore that mature in the coming months.
Mutual funds, banks, insurance firms and a number of pension and provident funds under EPFO and PFRDA have taken a total exposure of at least Rs. 11,000 crore in DHFL’s non-convertible debentures (NCDs). According to BSE filings on 18 May, NCDs worth Rs. 41,000 crore have been downgraded by Brickwork Ratings from AA- minus to BBB+. And, FDs worth Rs. 12,000 crore have been downgraded from F AA- to BBB+ by this rating agency on the same day.
DHFL has been the subject of multiple downgrades in recent months. The most recent downgrade by CARE Ratings affected borrowings including long-term bank facilities, fixed deposit programme, perpetual debt, subordinated debt and Non-Convertible Debentures (NCDs) worth ₹1.13 trillion. Out of this, the Fixed Deposit Programme worth ₹20,000 crore was downgraded from CARE A to CARE BBB- (Credit Watch with negative implications). According to CARE Ratings, CARE A signifies ‘low’ credit risk, while CARE BBB signifies ‘moderate’ credit risk.