An Indian two thousand rupee banknote is arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

ICRA Downgrades DHFL’s Debt

Dewan Housing Finance Corporation Ltd.'s problems continue to grow as rating agency ICRA downgraded its debt instruments at a time when the non-banking lender is already facing corporate governance concerns.

ICRA downgraded its short-term rating on DHFL's commercial paper programme worth Rs 8,000 crore from 'A1+' to 'A2', according to a media statement. That's still the second-best rating on ICRA's scale, signifying instruments that “carry lowest credit risk”.

The rating agency has also kept DHFL on its watchlist with “negative implications”. “With limited fresh business generation and sizeable securitisation and assignment of loan assets, the pool eligible for sell down has also been declining, thereby reducing the company’s ability to refinance through securitisation,” ICRA said. “While the present resources, along with monthly collections, would be adequate to meet the scheduled repayments till March 2019, the liquidity position could get stretched in case of any acceleration of debt by the lenders and/or higher-than-anticipated premature deposit withdrawals.”

DHFL was one of the worst hit firms affected by the liquidity crisis that engulfed the non-bank lenders after Infrastructure Leasing and Financial Services defaulted on its debt obligations. DHFL saw loan disbursements in the third quarter fall 95 percent after the sale its debt securities by a mutual fund at a significant discount sparked panic, squeezing its market funding. DHFL was forced to curtail fresh lending and generate liquidity to service its existing liabilities.

Besides, news website Cobrapost had alleged that the company siphoned off Rs 31,000 crore by extending loans to shell companies owned by its promoters—a charge that prompted Bank of Baroda Ltd. to audit loans given to DHFL.

As on date, DHFL has outstanding commercial paper worth Rs 1,525 crore. The company indicated to ICRA that it shall buyback substantial portion of this amount over the next one month.

ICRA did note that the housing finance company has been regular in meetings its debt obligations and has a long track record of operations. Its profitability indicators have been stable, except when there was liquidity stress and its ability to give loans was affected, the rating agency said.

DHFL’s ability to return to normal business levels, while maintaining its profitability, asset quality and solvency profile will remain a key rating monitorable.

Also read: DHFL Independent Director’s Resignation Letter Contradicts Company Disclosure

There are other challenges too. DHFL saw a decline in the share of individual housing loans while an increase in project loans. "Given that the project loan book is recently originated, and a large portion of this portfolio remains under moratorium, the portfolio remains relatively unseasoned," ICRA said.

Its reduced ability to refinance means that DHFL, like others in the NBFC industry, are relying on securitising assets. DHFL is also dependent on refinancing of maturing liabilities. ICRA said that DHFL has a significant share of fix deposits in its borrowings which means the "continued premature redemption" may further weaken its liquidity position.

“ICRA will continue to monitor the progress on approvals for stake sale of non-core assets, company’s progress on onboarding a strategic investor as well as progress on sale of the project finance book and timely execution of these will be the key rating sensitivities along with its ability raise fresh funds and resume normal business,” the rating agency said.

Also read: Is Another Bout Of Volatility Brewing For Debt Funds?

Rating Uncalled For: DHFL

The mortgage lender issued a statement terming the rating action “uncalled for”, at a time when it’s “slowly getting back to normalcy” and has met its obligations. “Our commercial papers ratings were reaffirmed by ICRA in September 2018, followed by another revalidation in December 2018.”

The company said it had also indicated its intent to extinguish the commercial papers outstanding by the end of March. This, according to DHFL, “was acknowledged by ICRA in its statement, but failed to take cognizance of in its decision and chose to go ahead with their rating action”.

The lender said it will take all steps to protect the interests of its stakeholders and continue to service its obligations.