DHFL assigned default rating; MFs with high exposure see 30-50% drop in NAV

Rating agencies on Wednesday categorised the Dewan Housing Finance Corporation (DHFL) instruments as ‘default’ a day after the company delayed its repayment obligations on non-convertible debentures (NCDs), potentially burning a deep hole in the portfolios of many mutual fund (MF) schemes. More than 160 MF schemes hold the firm’s debt papers.

CRISIL and Icra assigned ‘D’ rating to DHFL’s commercial papers, anticipating a default, while CARE Ratings marked D, or default, the housing finance firm’s all long-term facilities, including public NCDs of Rs 29,000 crore and fixed deposits of Rs 8,940 crore. Brickwork Ratings downgraded debt valued at over Rs 58,000 crore. 

DHFL Chairman & Managing Director Kapil Wadhawan said the action by the rating agencies was “extremely surprising” and “unwarranted”. DHFL, he said, would seek clarification from these agencies on the rationale that predicted its inability to service pay-outs on the due dates. He said the company had repaid close to Rs 40,000 crore of financial obligations since September 2018, and that it sold strategic retail assets including Aadhar, Avanse and DHFL Pramerica Asset Managers to ensure adequate liquidity to meet the repayments. 

“The company is committed towards ensuring repayment of all its obligations as well as on-boarding the strategic partner for its business,” Wadhawan said.               

CARE Ratings said the rating revision took into account the recent instance of delay in servicing obligations with respect to some of the NCDs due to prolonged liquidity stress. “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 securitisation,” it said, adding the company had a fairly large exposure to the lower and middle income group, which is more prone to defaults in case of a stressed economic scenario.

CRISIL and Icra, too, cited liquidity issues for downgrading the company’s ratings. Schemes with heavy exposure to debentures of DHFL saw a 30-50 per cent fall in their net asset value (NAV) on Tuesday. This markdown on MFs’ DHFL exposures was triggered after the company failed to make an interest payment of Rs 960 crore.

The sharpest hit was seen in DHFL Pramerica Medium Term Fund, which had 37 per cent of its assets in debentures of DHFL at the end of April. The scheme’s NAV saw a single-day fall of 53 per cent on Tuesday. The NAV of DHFL Pramerica’s Floating Rate Fund (with 32 per cent of assets in DHFL debentures) saw a 49 per cent fall. The NAV of Tata Corporate Bond Fund, which had 28 per cent of its schemes exposed to DHFL, dropped 29 per cent.

Further delay by DHFL in meeting its debt obligations could leave some fixed maturity plan (FMP) investors in the lurch. Reliance MF’s Fixed Horizon Fund XXIX (Series 18) — which will mature on June 6 — has 10.4 per cent of the scheme assets exposed to DHFL. UTI MF's fixed term income (series XXIV-XV) — which has 10.4 per cent exposure to DHFL debentures — will mature on June 18.

"The NAVs reflect the valuation provided by independent valuation agencies, basis the delay in servicing. The company management is confident of making these repayments in short term,” a Reliance spokesperson said.

According to people in the know, some of the FMPs in the industry with exposure to DHFL may have to side-pocket the exposures if payments get further delayed. “According to the existing norms, MFs can hold units of FMPs for two years where repayment is not made,” said a fund manager, requesting anonymity. "However, we expect DHFL to make the payment soon,” he added.

Among other fund houses, BNP Paribas Medium Term Fund and JM Low Duration Fund (exposure of 14 per cent and 18 per cent, respectively) saw a 10-12 per cent fall in NAVs on Tuesday. 

According to the data from Prime Database, MFs’ exposure to debt papers of DHFL stood at ~5,169 crore at April-end.

The new norms laid down by industry body Association of Mutual Funds in India require that an instrument downgraded to 'default or D' grade is marked down at 75 per cent. Meanwhile, the Securities and Exchange Board of India's proposed definition says one-day delay of even one rupee of interest or principal should be seen as a default.