DHFL's default can expose Rs 1-trn in borrowing to risk of default: CLSA

The recent default of around Rs 1,000 crore by Dewan Housing Finance (DHFL) on interest payment to its debenture-holders can accentuate a contagion risk and expose Rs 1-trillion in borrowing to risk of default / haircuts, says a recent report by global research and brokerage firm CLSA. 

The development, it says, will have a far-reaching impact on the financial sector with the fortunes of select non-bank finance companies (NBFCs) / housing finance companies (HFC), real estate, housing, auto and small-and-medium enterprises (SMEs) bearing the brunt.

Dewan Housing Finance Company (Dewan HFC), according to CLSA’s estimates, has Rs 1-trillion in borrowing with banks having funded half of this borrowed amount, followed by insurers and mutual funds. Nearly 10 per cent of this borrowing (Rs 10,000 crore) is through deposits. 

"Public sector banks (PSU banks) are also among the key lenders and among the private banks, YES Bank has higher exposure," the CLSA report authored by Aashish Agarwal and Prakhar Sharma says.

Besides YES Bank, Union Bank of India (exposure of 12 per cent of its net worth), Bank of India (11 percent), Bank of Baroda (8 per cent), Canara Bank (7 per cent), State Bank of India (5 per cent) and Punjab National Bank (4 per cent) have exposure to DHFL, the CLSA report says.

As regards mutual funds that have Rs 5,000 crore in exposure to the borrowing, CLSA expects them to take a 75 per cent haircut right away. Banks, it says, may also see mark-to-market (MTM) losses on bond exposure (12 per cent of their total), but loan provisioning (in the case of default) will be more gradual. 

"This default could also accentuate contagion risk in the financial sector (in the backdrop of IL&FS’ default last year) leading to higher costs and the polarisation of funds to better-rated NBFCs—those with liquid balance sheets will also be better off. This can have a rub-off effect on sectors with a higher dependence on NBFCs/HFC like real estate, housing, auto and SMEs. The RBI may need to consider liquidity lines," CLSA cautions.

Asset sale key

Going ahead, CLSA feels asset sales will be key to prevent defaults by DHFL, as expected repayments over the next two months are higher at Rs 6,000 crore versus expected collections of Rs 4,000 crore.

Over the past few days, there have been reports of DHFL's promoters looking to pare stake in the company with Apollo Global, ICICI Venture-backed Aion Capital, Lone Star and Cerebrus being among the potential buyers. Wadhawan Global Capital Ltd (WGC) currently owns 37.3 per cent in DHFL and is the primary stakeholder in this company.

The developments triggered a downgrade from across rating agencies with CRISIL and ICRA assigning ‘D’ rating to DHFL’s commercial papers (CP), anticipating a default, while CARE Ratings marked D, or default, the housing finance firm’s all long-term facilities, including public non-convertible debentures (NCDs) of Rs 29,000 crore and fixed deposits of Rs 8,940 crore. Brickwork Ratings, too, has downgraded debt valued at over Rs 58,000 crore.

On Thursday, the stock tanked 15 per cent on the BSE to Rs 95, also its five-year low. It has been the worst-performing counter among the housing finance companies at the bourses in calendar year 2019 (CY19), slipping 55 per cent YTD till June 4. In comparison, the S&P BSE Sensex has gained over 11 per cent during this period. The S&P BSE Mid-cap index (down around 1.6 per cent) and S&P Small-cap index (up 1.4 per cent) during this period have also fared better than DHFL, ACE Equity data show.