Silhouetted workers carry building materials at a construction site in New Delhi, India. (Photographer: Amit Bhargava/Bloomberg News)

DHFL’s Next Big Priority: Selling Down Developer Loans

Dewan Housing Finance Corporation Ltd.— among the worst hit by India’s credit crisis —is facing a renewed bout of pressure with two rating agencies downgrading the non-bank lender citing liquidity concerns.

DHFL, which has so far managed repayments by securitising its retail loan assets, will need to speed up sales of wholesale loans over the next few months to meet repayments, CARE Ratings Ltd. and Crisil Ltd. said in their respective ratings notes.

After a few months of stability, credit markets have turned nervous once again as non-bank lenders have nearly Rs 1.3 lakh crore in repayments coming due to the country’s mutual funds. With inflows into debt funds falling and asset managers consolidating exposure to non-banking financial companies, roll-overs are likely to be limited. As such, NBFCs will need to generate enough liquidity to meet repayments.

In DHFL’s case, outflows until July are estimated at Rs 8,400 crore, according to Crisil. Liquidity on hand as of April 30, 2018 was Rs 2,775 crore. The company, however, expects inflows of Rs 6,600 crore from May 2019 to July 2019, said CARE Ratings.

To be sure, the company in a recent statement, said that speculation around its liquidity position is unwarranted. “We would like to place on record that the slowdown in business activity in the industry has not had any adverse impact on DHFL’s debt repayment ability or loan servicing and collections of the company,” it said in a statement on May 10.

An email sent to DHFL on Wednesday was remained unanswered.

Loan Sell-Downs

DHFL has raised Rs 17,860 crore through securitisation in the first nine months of FY19, according to an investor presentation dated Feb. 11. With the exception of one transaction where a project loan was sold to Oaktree Capital Management for Rs 1,375 crore, most of the securitisation has been restricted to retail loans.

The focus has now shifted to selling wholesale loans, which is proving to be difficult.

“The downgrade is driven by a more-than-expected reduction in the company's liquidity because of further delays in fund raising from sell down of project finance loans and lower inflows from securitisation of non-housing loans” Crisil said in its rating note.

CARE Ratings cited similar concerns.CARE Ratings will continue to monitor the progress of various initiatives such as further sell down of builder book and pool securitisation to build up additional liquidity in near term,” it said.

As of December, DHFL had Rs 21,539 crore in loans outstanding to developers. As a percentage of their total assets under management, these loans made up 17 percent of the book. The top five housing finance companies have a total exposure of Rs 1.26 lakh crore to real estate developers.

Trouble With Securitising Developer Loans

The only project loan sale in recent months was the deal between DHFL and Oaktree Capital and that too was done on terms which were heavily skewed in favour of the investor.

According to an analyst, who spoke on condition of anonymity, the Rs 1,700 crore loan was split into two tranches. The first tranche of about Rs 1,300 crore was sold to Oaktree, while DHFL retained the subordinate tranche. The first tranche was sold at a yield of 17 percent, but the second tranche that DHFL held on to would not yield anything over and above the principal repayment, the analyst explained.

Essentially, DHFL forfeited any interest income it would have earned from the construction project.

Beyond alternative asset investors like Oaktree and a handful of others, there is limited interest from banks for such loans.

Vibhor Mittal, head of structured finance at ICRA, explained that apart from limited interest in such loans, regulations restrict NBFCs and HFCs from securitising loans that have not been fully disbursed.

Since project loans, like term loans, are disbursed over time and not in a single tranche, the criteria for securitisation restricts HFCs from selling project loans that are not fully disbursed, he said, adding that there is no appetite from the market for under-construction projects also.

The analyst quoted above said that banks remain picky about the loans they purchase from NBFCs. Even if they were to purchase developer loans, they may avoid loans given to projects in regions like the National Capital Region or Mumbai, where there is perceived to be an oversupply.

Alpesh Mehta, deputy head of research at Motilal Oswal Financial Services, said that banks remain conservative on corporate lending and may stay away from developer loans. “Banks are comfortable buying retail loans from NBFCs and HFCs given the lower risk-weights of these loans compared to developer loans and because it adds granularity to their lending book,” he said.

Collateral Impact

Unless the situation turns, DHFL may see some collateral damage.

Continued securitisation of retail loans, limited growth in fresh disbursement and an inability to sell-down developer loans will skew DHFL’s portfolio. This, in turn, could hurt their rating profile further, due to the higher risk attached to developer loans as compared to pure housing finance loans.

This mix of loans will be watched carefully in coming quarters, Ashish Gupta, head of equity research at Credit Suisse told BloombergQuint in a recent interview.

“If we look at the core asset of these HFCs, which is mortgages, there is no discomfort with that. I think it is the developer exposure which is causing discomfort....Going forward, one learning from this episode may be that even if an HFC is 75 percent mortgages, you have to see it as a hybrid rather than entirely a mortgage book,” Gupta said.