Fund houses with exposure to debt instruments of Dewan Housing Finance (DHFL) have opposed banks' proposal to pay retail investors and pension funds in full.
Officials from fund houses told banks that the plan will force 'secured creditors' like mutual funds (MFs) to take a haircut, according to a report by The Economic Times.
Repaying unsecured creditors in full sets a bad precedent, according to fund houses. They now want banks to apply pressure on DHFL's promoters to inject funds into the company, the report added.
“We do not want to be a part of the agreement (ICA) as SEBI has already cracked a whip against some fund houses who had standstill agreement with Essel Group,” a fund manager told Moneycontrol. The manager was from a private fund house and did not wish to be named.
Echoing similar view, another fixed income head at a bank-promoted fund house said, “We do not want to commit that mistake of another standstill agreement. We are in talks with DHFL management and hoping that they pay off the dues.”
The Securities Exchange and Board of India (SEBI) has made public that it was discontent about the questionable practices of mutual funds which created a series of fiascoes in fixed maturity plan (FMP) debt schemes.
After its Board meeting on June 27, SEBI Chairman Ajay Tyagi categorically stated that the market watchdog does not recognise standstill agreements between promoter who borrowed capital, and the investing mutual funds. MFs are not banks, and they should be investing rather than lending, asserted the SEBI Chairman.
Currently, 10 mutual funds have a total exposure of around Rs 5,000 crore to DHFL, out of the housing financier’s total debt of nearly Rs 1 lakh crore.
What is ICA?
An inter-creditor agreement is a contract between the debtor and all the creditors when the debtor is no longer able to pay its dues.
This agreement pays for some part or percentage of the loan extended by each of the lender, and the debtor receives a final discharge for the remaining amount due.
The debtor can make a new start and the creditors receive their payments immediately.
Lenders to the cash strapped crisis-hit DHFL signed an inter-creditor agreement (ICA) for resolution of stressed assets on July 5. This will form the basis for putting together a resolution plan (RP) for the DHFL account.
The consortium, comprising about 35 lenders, is moving proactively as per the RBI's June 7 circular on Prudential Framework for Resolution of Stressed Assets. Under the framework, lenders can initiate the process of implementing a resolution plan (RP) even before a default has occurred.
The restructuring plan, which is being prepared under the Reserve Bank of India’s 7 June circular, could include extending the tenure of loans, conversion of debt into equity, fresh working capital and inducting a new management team and financial investors.
Once the agreement is in place, DHFL will have to submit a resolution plan.
Money at stake?
DHFL has borrowings of over Rs 1 lakh crore, and banks hold about nearly half of the total debt. The rest is held by mutual funds, depositors and others.
Early June, DHFL said it was to repay Rs 225 crore out of the total Rs 375 crore of commercial paper to slew of investors which also included mutual funds.
This was the second time in June that the company missed the repayment deadline on a set of outstanding bonds.
On 4 June too, DHFL had defaulted on interest payment on its non-convertible debentures, following which its credit rating was downgraded to default, or D, by credit rating agencies CRISIL and Icra.
However, DHFL was able to make the interest payment within a seven-day grace period given by the bondholders.
On July 13, DHFL reported a net loss of Rs 2,223 crore for the March quarter. This is a sharp drop from a profit of Rs 134 crore in the previous year’s corresponding period.
In event of secured borrowings by mutual funds if collateral of DHFL shares is sold off by MFs this may not fetch much as DHFL shares have crashed from Rs 113 on June 1, 2019, to Rs 48 on July 15, 2019.
This appears a reason for mutual funds to be bothered as despite having secured the DHFL lendings, share sale may cover only fraction of lendings.
Although with secured lending, MFs are in a better position compared to unsecured lenders of DHFL.
As per murmurs in industry, DHFL may not sustain its operations for long unless it gets a fresh round of financing. Remains to be seen how quickly new round of funds are arranged by DHFL or will it find an angel stakeholder.
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