DHFL’s Retail Depositors, NCD Holders May Need To Brace For A Hit

Depositors who parked their money with Dewan Housing Finance Corporation Ltd. via retail non-convertible debentures or fixed deposits may need to brace for a hit as resolution plans submitted for the insolvent lender all involve a substantial haircut for financial creditors.

Retail bondholders and depositors were clubbed together with financial creditors for the purpose of DHFL’s insolvency proceedings. In the absence of an overarching law for financial sector insolvencies, DHFL is being resolved under a special window of the Insolvency and Bankruptcy Code and does not have any specific provisions applicable to retail depositors.

According to two people familiar with the matter, retail depositors and bondholders may have to depend on financial creditors to get their due under the resolution process. None of the bidders have placed any special emphasis on retail depositors in their plans and intend to treat them as unsecured financial creditors. As such, the final distribution of funds is dependent on the committee of creditors, these people said.

Secured financial creditors may consider giving a higher payout to retail depositors and investors compared to other unsecured creditors, said the first person cited earlier. But a decision on this issue hasn’t yet been taken, the person said.

The resolution process under IBC has definite rules unlike other resolution mechanisms, the first person cited earlier said. As such, there is limited flexibility with the committee of creditors.

Usually, under IBC, financial creditors are paid out a share of recoveries on the basis of securities they hold. Unsecured creditors tend to get a lower share of the funds as they have no securities against the money they have lent. The decision is taken through a voting mechanism among the committee of creditors. Retail NCD holders and depositors to DHFL are being represented on the committee by intermediaries they selected.

The RBI-appointed administrator for DHFL did not respond to a call and message on Wednesday. An email sent on Saturday wasn’t answered. SBI didn’t respond to queries sent on Tuesday.

In August 2019, the lenders to the housing finance company had agreed to a resolution plan where NCD holders with under Rs 10 lakh in investment and individuals with less than Rs 10 lakh in deposits were to be repaid in full at the agreed coupon or interest rate, BloombergQuint had reported. However, in November 2019, the Reserve Bank of India rejected this plan and referred DHFL for insolvency proceedings.

Should retail investors and depositors in DHFL take a significant haircut, it would be the second such instance in recent months. Previously, retail investors who had purchased Additional Tier-1 bonds issued by Yes Bank saw their securities being fully written off as part of the resolution plan.

“Situations such as DHFL and Yes Bank are the exceptions and not the norm. Investors or depositors go for such investment opportunities because they offer a higher return than what traditional bank deposits tend to offer,” said Pankaj Mathpal, founder and chief executive officer of Optima Money. “But the question is if the reward is worth the risk?”

What The Bidders Are Offering

The financial creditors of DHFL have received bids from four different investors, who are looking to purchase the housing finance company’s assets. These include Oaktree Capital Management, Adani Group, Piramal Group and Hong Kong-based SC Lowy.

Oaktree Capital

American asset management company Oaktree Capital is looking to purchase the entire loan book of DHFL as part of its plan. As per four people with direct knowledge of the matter, which includes the two people cited earlier, Oaktree Capital is offering Rs 28,000 crore to the creditors, against DHFL’s Rs 87,000-crore worth loan book. The plan includes Rs 12,000 crore to be paid immediately and Rs 16,000 crore will be paid over seven years through non-convertible debentures. The offer works out to roughly 33% recovery for the financial creditors.

Oaktree Capital declined to comment on the matter.

Piramal Group

Ajay Piramal owned Piramal Group is looking to purchase DHFL’s entire retail portfolio for Rs 15,000 crore as part of its resolution plan. The housing financier has retail loans worth about Rs 30,000 crore on its books. The plan involves repaying Rs 9,000 crore upfront and Rs 6,000 crore to be repaid through long-term debt instruments issued to the lenders, the four people cited earlier said.

The Piramal Group declined to comment.

Adani Group

Adani Group is looking to purchase Rs 50,000-55,000 crore worth construction finance, mortgage loans, corporate loans, inter-corporate deposits and slum rehabilitation loans on DHFL’s loan book. For this, the group is willing to offer lenders a repayment plan with Rs 3,000 crore in repayments to lenders, about 5% recovery for the creditors.

An email sent to the Adani Group on Saturday and a follow-up query sent on Tuesday went unanswered.

SC Lowy

The Hong Kong-based stressed asset investor is looking to purchase only DHFL’s wholesale lending portfolio worth about Rs 36,000 crore and has offered a repayment plan involving Rs 4,000-4,500 crore in repayments structured over a longer period. The repayments are subject to recoveries from the underlying assets, as per the four people quoted above.

SC Lowy confirmed the submission of its resolution plan, without clarifying on the specifics of the plan.

What Next?

The second of the four people cited earlier said lenders are individually reviewing the plans and will be meeting next week to decide on further steps.

The third person cited earlier, a senior official at a large state-run lender, said the lending consortium would be keen on negotiating further with Oaktree Capital since the bidder is willing to pay a lump sum to purchase the entire loan book.