Sum required to maintain capital adequacy, help raise funds to continue operations
DHFL shares plunged on Monday after the firm’s weekend admission of its precarious state
Mumbai: Mortgage lender Dewan Housing Finance Corp. Ltd (DHFL) needs between ₹2,500 crore and ₹3,000 crore of fresh equity investments to sustain lending operations, two people aware of the development said.
DHFL, which declared a quarterly loss of ₹2,224 crore on Saturday, said in its notes to accounts that the National Housing Bank has restated the company’s FY18 capital adequacy ratio, which measures a bank’s capital in relation to its risk-weighted assets, at 10.24%, lower than its own assessment of 15.29% and the regulatory minimum of 12%. The company, however, said it does not concur with the housing finance regulator’s observation and will provide an appropriate response.
Yet, DHFL’s survival hinges on additional capital inflows. Unless it finds fresh money, many lenders, especially banks, will be reluctant to give fresh loans. These loans will enable DHFL to on-lend to some committed but unfinished projects, which will then fetch interest income. “According to assessments by potential investors, DHFL will need anywhere between ₹2,500 crore and ₹3,000 crore in fresh equity immediately to meet capital adequacy requirements," said the first of the two people cited earlier, both of whom spoke on condition of anonymity.
The mortgage lender has been the worst hit by the liquidity crisis triggered by defaults at Infrastructure Leasing and Financial Services Ltd that dried up access to funds for many non-banks.
PE firms Oaktree Capital, Cerberus Capital and AION Capital have already submitted non-binding offers to buy a stake in DHFL, the first person said, adding that the mortgage lender’s board will discuss the offers at its next meeting.
“Many investors have sought assurances from DHFL’s lenders that they would infuse fresh loans into the company after the infusion of equity," added the first person.
DHFL shares plunged on Monday after the firm’s weekend admission of its precarious state. After opening at ₹61.65 on BSE, DHFL shares fell 32% to their lowest in a decade, before recouping some losses to end 29% lower at ₹48.50.
DHFL wrote to stock exchanges on Monday that it was “closely working with the stakeholders/creditors to ensure that there is a comprehensive resolution, without any haircut to the lenders, as has been speculated by few sections of the media".
Emails sent to DHFL and Cerberus Capital seeking comment remained unanswered till press time; Oaktree Capital and AION Capital declined to comment.
On Saturday, DHFL said it has been under substantial stress since the second half of FY19. The firm said it has suffered consistent downgrades in its credit rating since February, and its ability to raise funds has been impaired and the business brought to a standstill, with virtually no disbursements. “These developments may raise a significant doubt on the ability of the company to continue as a going concern," it said.
DHFL’s lenders are waiting for its audited balance sheet to decide on a rescue package for the firm. According to the second person cited earlier, banks could consider giving fresh loans to the company but that would be for specific unfinished projects that could then be completed and sold. “Once the audited balance sheet is available within the next few days, the consortium will meet and take forward the resolution plan," this person said.
According to RBI’s 7 June circular, 75% of lenders by value of the total outstanding credit facilities to a stressed company and 60% by number must agree on an inter-creditor agreement (ICA) for it to be binding on all lenders.
State Bank of India has an exposure of about ₹10,000 crore to DHFL, the bank’s chairman Rajnish Kumar told shareholders at its annual general meeting in June. Other lenders to DHFL include Bank of India, Central Bank of India, Andhra Bank, Canara Bank, Punjab National Bank and Corporation Bank. As of December, DHFL had an outstanding debt of ₹1 trillion, of which 38% was in the form of bank loans, 47% from debt markets and 10% through deposits.
According to a mutual fund manager, who spoke on condition of anonymity, a meeting of mutual funds with exposure to DHFL has been slated for 16 July to decide a course of action. He said funds had been given no clarity about the extent of loss they would have to bear if they signed the ICA. The ICA also has provisions for infusion of fresh funds, which mutual funds are not in a position to provide.
The fund manager added that mutual funds would consider proposals to protect retail investors who have fixed deposits in DHFL or have invested in DHFL’s non-convertible debentures, if the total amount of such investment is small. The ICA may decide a cut-off for defining a retail investor in such a scenario, the fund manager said.
Mint reported on 13 July that DHFL’s seven state-run lenders, including SBI 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 its ₹1 trillion debt. On 13 July, DHFL said there were some lacunae in loan documentation for certain projects or mortgage loans and the management was trying to rectify this by September. “Pending completion of this exercise, no adjustments have been made to the carrying values of these loans aggregating ₹20,750 crore," it said.