The DHFL resolution plan is likely to include asset securitisation and conversion of debt into equity as an interim measure until a new investor is found. (Source: BloombergQuint)

Banks To Sign Inter-Creditor Agreement For DHFL Resolution By July 5

Lenders to Dewan Housing Finance Corporation Ltd. have decided to sign an inter-creditor agreement before July 5 to thrash out a DHFL debt resolution plan, sources aware of the development said on Monday.

The consortium of creditors have set June 29 as the record date for the resolution, three bankers who attended the lenders’ meeting said. "The meeting decided to sign an inter-creditor agreement latest by July 5," said one of the bankers cited above.

The lenders at the meeting also took stock of the month-end and quarter-end cash flow situation of DHFL, amid promoters’ plan to pare stake and generate cash for debt repayments.

According to sources, the DHFL resolution plan is likely to include asset securitisation and conversion of debt into equity as an interim measure until a new investor is found.

The Wadhawan family, which owns a little over 39 percent in DHFL, has been looking at various ways of coming out of the stress that first came to light late last year following crisis at the IL&FS Group. These include selling stakes in group companies, while they are also reportedly fine with giving up half of their stake in the listed entity.

While an alternative investing fund has reportedly evinced interest in DHFL’s wholesale book, at least two private equity funds are said to be interested in buying into the firm.

DHFL was subjected to several rating downgrades last month after it defaulted on Rs 1,150 crore to bond holders due on June 4. This led to a downgrade of its Rs 850-crore commercial papers to 'default' by three ratings agencies.

On June 11, it paid Rs 962 crore out of Rs 1,150 crore towards interest NCD repayment, but on June 25, it failed to fully redeem another commercial paper worth Rs 225 crore.

Over the weekend, DHFL sought the market regulator’s nod to delay its March quarter results announcement by a fortnight.

The housing finance firm owes nearly Rs 90,000 crore to banks and other financial institutions, according to its FY18 annual report.

According to one of the banker cited above, since DHFL has defaulted on debt, and the 30-day review period has already begun under Reserve Bank of India’s new circular for bad loan recognition effective June 29, the lenders will now have to sign an inter-creditor agreement to decide on a resolution plan.

According to the RBI’s new NPA rules, issued June 7, if a borrower is reported to be in default by any of its lenders, other lenders should undertake a review of the account within 30 days of such a default.

During the review period, banks may decide on a resolution plan and wherever a plan has to be implemented, all lenders will enter into an inter-creditor agreement within those 30 days to provide for ground rules for finalisation and implementation of a resolution plan.

At Monday’ meeting, DHFL lenders also reviewed liquidity position of the company.

"We wanted to see DHFL's cash flow at the end of the June quarter. There are certain large customers that repay towards the end of the quarter to companies. So, the collection at the end of the quarter is higher than the month-end," said another banker.

The RBI blames the NBFC crisis on asset liability mismatches at firms like DHFL, which typically borrowed short for creating long term assets. The regulator has vowed to do everything possible to ensure systemic financial stability but nothing has been done to improve their liquidity as yet.

In the past week's financial stability report, the central bank said the impact of a big housing finance company going down will be the same as a large bank going down.

Bloomberg Quint

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