How Lenders Want To Resolve DHFL Stress
Children look at a map of the Alice in Wonderland Maze at Walt Disney Co.’s Shanghai Disneyland theme park during a trial run ahead of its official opening, in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

How Lenders Want To Resolve DHFL Stress

Lenders to Dewan Housing Finance Corporation Ltd., who are finalising a resolution plan to save the beleaguered housing financier, are mulling to take over its operations, two people in the know said.

While the resolution plan is still in preliminary stages, lenders led by State Bank of India could end up becoming majority owners of DHFL and appoint their representatives to run the company, the people said on condition of anonymity as the discussions are confidential.

What The Resolution Plan May Look Like

The lending consortium, according to the plan, could convert their loan exposure to the housing finance company into equity and have a controlling stake. The consortium could then create a common pool for all the equity stakes they control individually. This pool would be controlled by an entity created by the lending consortium, which would also appoint current or former bankers to manage DHFL’s daily operations.

The banks believe that unlike other creditor companies in which they had converted debt into a controlling equity stake in the past, home loans is a business they know very well, the people cited earlier said. This could help avoid a distress sale and allow lenders to continue managing DHFL’s operations till an appropriate deal is struck.

Also, once lenders control DHFL, they can infuse further capital to stabilise it, without questions being raised by investigative agencies. As part of the resolution plan, lenders may also have to reschedule DHFL’s loans to certain projects, to avoid large defaults, the people cited earlier said.

An initial assessment by the lenders pegged the net present value loss at 35-40 percent in DHFL. This could mean that once they’ve restructured the project loans, lenders might have to take some amount of haircut to their loan exposures.

To be sure, SBI Capital Markets, which was appointed as an advisor to the lenders, is still formulating the plan. The lending consortium expects the final draft of the plan to be ready this week, after which, they will begin negotiations. DHFL has so far been kept out of the discussions and will be brought in during the negotiations, the second person cited earlier said.

Some private banks have not yet signed the inter-creditor agreement, which is mandated under the Reserve Bank of India’s June 7 restructuring circular. This could complicate issues since these lenders wouldn’t be governed by the norms stipulated in the inter-creditor agreement. The consortium is hopeful that they will get all banks on board before they implement the resolution plan.

SBI and SBI Capital didn’t respond to queries emailed to them on Tuesday, while a response is awaited from DHFL.

Also read: Public Sector Banks Helped DHFL Stay Afloat Through Large Loan Purchases

DHFL owes over Rs 55,000 crore to banks in loan repayments. While it hasn’t defaulted on bank repayments yet, it has delayed repayments on certain bonds. On June 4, the company had only made part payments on certain non-convertible debentures but managed to make good on its dues within a seven-day cure period. The company, however, once again defaulted on June 25. Earlier, on May 11, DHFL halted any premature withdrawals of fixed deposits and stopped taking fresh deposits in order to manage its liquidity position better.

Following this, the lenders decided to resolve the company’s stress under the RBI’s restructuring circular.

SBI and Bank of Baroda have the highest exposure to the company. Bank of India and Union Bank of India are also large lenders to DHFL.

Also read: Troubles At DHFL, Reliance Capital: Whose Risk Is It Anyway?

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