ICRA Downgrades DHFL Mortgage Loan Pools As Securitisation Payouts Stop
Three mortgage loan pools were downgraded to ‘D’ from ‘BBB’
Rating agency ICRA Ltd. has downgraded six loan pools of Dewan Housing Finance Corporation Ltd. The downgrades followed a judgement of the Bombay High Court, dated Oct. 10, which put an interim stay on payouts by DHFL to both secured and unsecured creditors except on a pro rata basis. The interim judgement came in the course of hearings on a case between Reliance Nippon Life Asset Management Ltd. and DHFL.
The Mumbai High Court has restrained DHFL to make any payments until the company files a reply on the court matter, said a senior company official, who spoke on condition of anonymity. Because of this judgement, payments for securitisation pools have been put on pause for the next few weeks, until the final judgement, the official said.
As part of securitisation deals, a lender sells pass-through certificates to investors, which represent individual units of a pool of loans. The lender subsequently continues to collect payments on the loans sold and puts the funds into a ‘collection and payout’ account. These funds go directly for payouts to investors, who are essentially creditors.
Since the Bombay High Court judgement put an interim stay on payments to all creditors, payouts on securitised instruments have also stopped.
...pending the hearing and final disposal of the underlying suit, the defendent no.1 (DHFL) be temporarily injuncted and restrained from making further payments and/or disbursements to any unsecured creditors of defendent no. 1 and secured creditors of defendent no. 1 except in cases where payments made on pro rata basis to all secured creditors, including the plaintiff (Reliance Nippon Life Asset Management), out of its current and future receivables, in preference to payments owed to the plaintiff, without the sanction of this Hon’ble Court.Bombay High Court Interim Judgement (October 10)
With the payments stopped, ICRA downgraded six loan pools, which had an initial value of Rs 1,690 crore. The outstanding value of these loan pools is Rs 647 crore.
- Three mortgage loan pools were downgraded to ‘D’ from ‘BBB’
- Three mortgage loan pools were downgraded to ‘BB’ from ‘BBB’
In its accompanying rating rationale, ICRA said that the rating downgrade was due to the inability of DHFL to fund collection and payout account for four loan pools before the due date of Oct. 10.
It added that in the case of three of these loan pools, “the cash collateral (CC) lien marked in favour of the Trustee could not be dipped in a timely manner owing to operational reasons, thereby leading to a default on the purchaser payouts.” In the fourth case, the trustee dipped into the cash credit placed in the form of fixed deposits and payouts were made to the investors on the due date, ICRA said.
“Rating actions factor in the ongoing legal proceedings against DHFL, which might impact its ability to transfer the pool collections into the respective ‘collection and payout’ account under the rated transactions in a timely manner,” the rating agency added.
According to ICRA, the performance of loan pools downgraded was strong till August 2019, as evidenced by the healthy collection efficiency and low delinquency levels.
“In the event that the collection and payment accounts are not funded, the cash credit is sufficient to meet the payouts to the investors for the next 5-12 months, though the timely utilisation of the cash credit by the Trustee would remain critical,” ICRA said.
A second person familiar with the matter said that the loan pools remain healthy and dues are being held in fixed deposits of certain banks. Still, since the payouts on the securitisation instruments are not being made, those loan pools may need to be marked down to ‘D’ and banks would need to provide against them.