BQ Exclusive: DHFL Lenders Seek RBI Approval To Take Over A Portion Of The Company
Lenders to the beleaguered Dewan Housing Finance Corporation Ltd. have decided to proceed with a contingency plan which involves them taking over at least a part of the company’s operations. This, after a resolution plan submitted by the company was not agreeable to lenders.
DHFL, which first defaulted on its dues in June, has over Rs 85,000 crore in liabilities, of which about 40 percent are to banks.
Lenders have proposed to take over the housing finance company’s retail loan book worth nearly Rs 50,000 crore and run it as an independent unit, said three people with direct knowledge, while speaking on condition of anonymity.
To achieve this, lenders will first split the DHFL loan book into two, where the stressed corporate loan portfolio would be converted into long-term equity-like instruments. The rest of the company, consisting of only the healthy retail loan book, would be taken over by the lenders, after they convert a small portion of their loans into equity. A holding structure would be created, which will act as a trustee of the lender’s equity stake in DHFL, the people quoted above said.
The lenders to DHFL will appoint bankers to run the company and overhaul the management. They will also infuse further funds into the company to ensure that DHFL can restart its core lending business. Currently, the company has completely stopped all forms of lending and only continues with servicing existing loans.
The consortium of lenders hopes to eventually sell the unit holding the retail loans at a premium to investors, according to the head of a large public sector bank, one of the three persons mentioned above. The consortium is expecting to hear from the Reserve Bank of India before the end of September, the banker said.
The DHFL resolution plan has been sent to RBI for approvals, since no clear resolution structure for financial companies exists, the people quoted above said.
On July 10, BloombergQuint had reported that the lenders would considering taking over the company and run it as a separate entity, as a last option.
Queries were mailed to State Bank of India, DHFL and RBI on Tuesday evening. Responses are awaited.
Dealing With The Developer Loans?
Apart from its mortgage portfolio, DHFL has Rs 35,000 crore worth of corporate loans to developers. These, the three people quoted above said, will be converted into long-term, equity-like instruments and sold to distressed asset funds, which may buy it at a steep discount. The corporate loan portfolio includes about Rs 15,000 crore worth of loans to slum rehabilitation projects.
The lenders will make due provisions for the underlying loans to ensure that the haircut is covered for, the first of the three people quoted above said.
Lenders are currently in negotiations with some distressed asset funds for the sale. They are also likely to introduce terms in the sale contract, where the investors would have to pay back lenders if they are able to recover higher amounts than they are projecting on the underlying loans.
According to the second person quoted above, lenders could need to write off nearly 35-40 percent of the DHFL debt as haircut during these sales. The final recovery could change, depending on how successful the distressed asset investors are.
On Aug. 30, the DHFL board approved a proposal to issue shares to lenders after they convert debt to equity. The board agreed to take the company’s paid-up equity capital to Rs 1,090 crore from Rs 828 crore. This was an enabling resolution to ensure that the lenders can be issued fresh shares whenever they convert their debt.
DHFL has been struggling to meet its liabilities since Sept. 2018, after the IL&FS Group defaults led to a virtual freeze on credit available to non-banking financial companies and housing finance companies. It had managed to stay afloat for a few months by selling down its portfolio to banks in bilateral deals. However, in July, the lenders to the company signed an inter creditor agreement to deal with the financial stress it was facing.
Under RBI’s June 7 circular on stressed assets, DHFL had proposed a plan to the lenders, which involved paying retail and small value investors upfront at the interest rates they were originally contracted with, while the rest of the creditors to the company—including banks, mutual funds and large institutions that had invested in its non-convertible debentures—would be paid over 16 years at various intervals.
Lenders to DHFL did not agree with the plan proposed by the company and chose to take over the company and run its operations, the three people quoted above said. The final debt resolution plan is a tweak on the company’s proposal where the ownership of the company would change, they added.
DHFL’s loan book dropped to Rs 89,387 crore as on March 31 compared with Rs 92,165 crore a year ago. It’s total assets under management rose moderately to Rs 1.19 lakh crore.
Watch | What was at first a back-up plan has now become the most likely resolution option for DHFL.