India’s third-largest housing finance company, DHFL, is gasping for fresh life.
On June 4, 2019, DHFL delayed the interest payment on its Rs 850-crore worth Commercial Paper (CP). Following this event, the independent rating agencies downgraded DHFL debt to Default (D).
Within just 4 months, DHFL’s credit rating has taken a serious knock from “AAA” to “D”.
What appeared as a liquidity issue initially has now developed into a full-blown crisis for DHFL. Many experts are now suspecting it to be DHFL’s solvency issue, not just the asset-liability mismatch.
While the Company management claims that it’s honoured debt obligations of over Rs 40,000 crore since September 2018, the market believes it’s going to default in future. And independent credit rating agencies have echoed these concerned.
As a result, Non-Convertible Debentures (NCDs) with different maturities have lost upto 20% in just one day with yields shooting upto 20%.
Has DHFL caused any damage to the mutual fund industry?
The Indian mutual fund industry has an aggregate exposure of over Rs 5,000 crore to DHFL papers.
It sounds worrisome, doesn’t it?
Over 150 schemes will be affected if DHFL defaults on its future obligations.
Approximately 50 mutual fund schemes fell over 5% in a single day following the DHFL’s default.
At the fund house level, UTI Mutual Fund has been the top creditor of DHFL from the industry. On April 30, 2019, the fund house had an exposure of over Rs 1,700 crore to DHFL. Reliance Nippon Mutual Fund, with its approximately Rs 1,200 crore of exposure, stood second.
If you have noticed, we have been constantly cautioning investors about schemes that have exposure to the debt of stressed companies.
What should investment professionals and investors do at this juncture?
Those who are stuck with the schemes that are exposed to DHFL can hardly do anything at this juncture. Booking losses and getting out of troubled mutual fund schemes whose portfolio characteristics is not up to the mark is perhaps the solution.
DHFL has been trying to sell its maturing loan portfolios to banks and other investors to raise money to honour its obligations. It’s managed to reach a definitive agreement to sell its entire stake in Aadhar Housing Finance—India’s largest independent affordable housing finance company—to Blackstone. Moreover, Wadhwan Global Capital, a promoter group entity, has been trying to inject liquidity into DHFL by offloading various assets it owns.
Some media reports also suggest that the promoters of DHFL may sell their stake in the Company within a month and may even lose the management control.
That being said, there is no point in being overoptimistic about these developments either. Independent credit rating agency, ICRA (a Moody’s Investor Service Company) has cautioned creditors of DHFL in its note highlighting Company’s constraints.
Though the company’s borrowing profile is well diversified, the recent industry-wide stress in liquidity has increased dependence on securitisation (~Rs 17,000 crore raised between September 24, 2018, and May 10, 2019). Moreover, DHFL is dependent on the refinancing of maturing liabilities, given the relatively longer tenure of the loans inherent in the housing finance industry.
While reliance on short-term borrowings through commercial papers has declined with the amount outstanding reducing to Rs 850 crore as on May 10, 2019, from Rs 8,715 crore as on September 30, 2018, the company would continue to depend on portfolio sales to meet its debt obligations till fresh funding resumes. DHFL reported a net fixed deposit outflow of Rs 1,356 crore during September 24, 2018, to December 31, 2018.
The liquidity position of the company is also stretched as evidenced by the delay in meeting its debt obligation.
As investment professionals, mutual fund distributors and investment advisers should ideally check the portfolios of debt mutual fund schemes before recommending them to investors given today’s challenging situation.
If debt schemes continue to accept fresh money, despite having exposure to stressed assets/borrowers, advisors and investors should avoid them at all costs, or that could hurt your financial wellbeing. A fund house and its fund managers should always act as prudent asset managers and do whatever is in the interest of investors.
At a time when the industry is struggling to find safe havens amidst the on-going debt crisis, accepting fresh investments indicates that the fund houses are interested only in growing their AUM.
They conveniently forget that a disregard for investors’ interest might cost distributors and advisors their reputation, as investors may lose their hard-earned money.
It’s noteworthy that not all fund houses are making bad investment decisions. The ones following robust investment processes and systems are better off. They don’t compromise on qualitative aspects such as corporate governance to accomplish their investment objectives and to stick their neck out.