A man holds two thousand and five hundred Indian rupee banknotes in Mumbai, India, on Friday, Jan. 27, 2017. While economists urge more investment in roads, ports and railways when the Indian government presents its budget Feb. 1, and maybe even direct cash transfers to boost consumption, a splurge carries the risk of a rating downgrade. Photographer: Dhiraj Singh/Bloomberg

Over Rs 1 Lakh Crore In DHFL Debt Downgraded To ‘Default’

Care Ratings has downgraded all outstanding borrowings of Dewan Housing Finance Ltd. to ‘Default’ grade after the non-bank lender missed interest payments on non-convertible debentures on Tuesday.

The rating agency cited increased liquidity pressures being faced by the company and delays in bringing in a strategic investor as the reason behind the downgrade. Care Rating’s rationale for downgrading all of DHFL’s borrowings is similar to that offered by CRISIL and ICRA, which cut the rating on the non-bank lender’s Rs 850 crore commercial paper programme to ‘Default’ on Wednesday.

The liquidity profile of the company continues to remain stressed on account of delay in identification and induction of strategic investor and limited progress on generating additional liquidity mainly through builder loan book sell down and securitization.
Care Ratings

DHFL, in a statement, said that the downgrades are not justified. "These actions are unwarranted and the company is seeking clarification on the rationale that predicts DHFL's inability to service pay-outs on the due dates. Such speculative rating rationale is not adequate. Since September 2018, DHFL has repaid close to Rs 40,000 crores of financial obligation. To ensure adequate liquidity to meet the repayments, DHFL also sold its strategic retail assets including Aadhar, Avanse and DHFL Pramerica Asset Managers. The company is committed towards ensuring repayment of all its obligations as well as onboarding the strategic partner for its business,” it said.

Also read: Bond Investors, Bankers Keep Wary Eye On DHFL After Rating Downgrade To ‘Default’

According to the ratings release from Care Ratings, the following facilities have been downgraded to ‘Default’ grade:

  • Long term bank facilities worth Rs 42,713 crore
  • FD programme worth Rs 8,940 crore
  • Debt instruments worth Rs 50,910 crore

There has been a deterioration in liquidity profile of DHFL with cash and liquid investments decreasing from Rs.4,668 crore (including statutory liquidity ratio) as on March 31, 2019 to Rs.2,775 crore (including statutory liquidity ratio) as on April 30, 2019, said Care Ratings.

As per liquidity statement as on April 30, 2019, the company was envisaging cumulative cash inflows of around Rs.6,600 crore from June’19 to Aug’19 as against scheduled cumulative cash outflows of around Rs.10,780 crore during the same period thereby reflecting a negative cumulative mismatch of around Rs.4,180 crore.
Care Ratings Statement

How Did It Get Here?

DHFL has been facing liquidity problems since September when defaults by the IL&FS Group triggered a credit crisis. Allegations of siphoning funds in January added to its troubles. In February, Harshil Mehta stepped down as chief executive officer but stayed on as executive president of its retail business.

Last month, CARE Ratings and CRISIL downgraded the company’s debt instruments, which made it even tougher for the company to raise fresh funds from the debt markets. It has so far relied on securitisation of retail loan assets and bank lines of credit to meet its liquidity needs. This, too, may become difficult now due to the debt downgrades.

On May 21, the mortgage lender had said that it will temporarily stop taking fresh deposits and won’t allow deposit holders to withdraw prematurely in order to manage liquidity better.

Also read: Mutual Fund NAVs Hit As DHFL Delays Interest Payment On Bonds