Mutual Funds in Trouble as Housing Finance Firm DHFL Defaults On Debt Repayment

India’s third largest mortgage finance company — the Dewan Housing Finance Corporation Limited (DHFL) — has been marked as a ‘defaulter’ by credit rating agencies as it delayed repayment on debt obligations due this month.  

This has yet again caused a flurry in the NBFC (Non-Banking Financial Companies) sector — still coming to grips with the IL&FS fiasco — as well as in the debt fund industry, as several mutual fund investors hold debt instruments of DHFL and have high exposure.

The housing finance firm has been facing a liquidity stress since some months, and missed an interest payment of Rs 960 crore on its Non-Convertible Debentures (NCDs) due on June 4.

NCDs are fixed-income investment instruments (with a specific term and interest income) that are issued by companies to raise long-term funds and cannot be converted into shares of equities of the issuing company.

DHFL still has a grace period of seven days to make the interest payment and prevent a default, and the company has been in talks with financiers to help meet its obligation, according to news reports.

However, the very next day after DHFL missed its payment deadline, four credit rating agencies — CRISIL, ICRA, CARE, and Brickwork Ratings — downgraded the rating of the firm’s debt papers to ‘D’ (or default) on June 5.

Also read: IL&FS: 82 Entities with Rs 61,375 Crore Outstanding Debt Cannot Fulfil Debt Obligations

While CRISIL and ICRA gave a ‘D’ rating to DHFL’s commercial papers, CARE assigned a ‘D’ to all of the firm’s long-term instruments, including public NCDs of Rs 29,000 crore and fixed deposits of Rs 8,940 crore. (DHFL is a deposit-holding NBFC.) Brickwork downgraded debt valued at over Rs 58,000 crore.

“DHFL has Rs 850 crore of outstanding CPs (commercial papers) of which Rs 750 crore is due in June 2019,” said credit rating agency CRISIL.  

“The first CP maturity is on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity.”

Meanwhile, mutual funds that have invested in the housing finance firm saw a free fall as they suffered one of the worst single-day losses on June 4, the same day that DHFL missed its interest payment.

As on April 30, 2019 (as per data from Value Research quoted in news reports), at least 22 mutual funds together held DHFL instruments worth Rs 5,236 crore spread across 163 mutual fund schemes.

Also read: Cobrapost Expose Claims DHFL Siphoned off Rs 31,000 Crore Public Funds

The Net Asset Values (NAVs) — the total value of a fund’s assets minus its liabilities — of several mutual fund schemes fell by up to 53%, due to the markdown of the value of their holdings in DHFL. 

The biggest hit was taken by DHFL Pramerica Medium Term Fund — which has the highest holding of DFHL debt papers, with 37.42% of its assets in debentures of the company at April-end — which saw a fall of 53% in its NAV on June 4.

Next was DHFL Pramerica’s Floating Rate Fund, with 31.94% of its assets in DHFL holdings, suffered a fall of 48.4% in its NAV (with one-year returns dropping to 44.2%).

Tata Corporate Bond Fund, with 28.21% of its assets in DHFL papers, saw its NAV plummet by 29.7% (with one-year returns dropping by 30.16%). Baroda Treasury, having 21.16% of its assets in DHFL papers, saw a decline of 17.2% in its NAV. DHFL Pramerica Low Duration, holding 20.11% of its assets in DHFL, bore a fall of 16.6% in its NAV.

BNP Paribas Medium Term Fund, with exposure of 14%, and JM Low Duration Fund, with exposure of 18%) saw a 10-12% decline in its NAVs the same day.

In fact, 10 debt schemes saw their NAVs fall by more than 10%.

Even the Fixed Maturity Plans (FMP) of mutual fund investors are going to be badly affected by further delays in DHFL’s debt repayments. For example, Reliance Mutual Fund’s Fixed Horizon Fund XXIX (Series 18), maturing on June 6, which has 10.4% of its scheme assets exposed in DHFL. Similarly, UTI MF's fixed term income (series XXIV-XV), with 10.4% exposure, will mature on June 18.

Also read: 1,400 Top Firms in India Hit by IL&FS Pandemic

Fund houses with the highest exposure in absolute terms (in rupees) include Reliance Low Duration Fund (which has invested Rs 408.30 crore in DHFL as of April) and UTI Short Term Income Fund (which has invested Rs 353.93 of April).

Since these figures are of April, for some fund houses the exposure is likely to have gone up in May.

Last September, DSP Mutual Fund sold some part of its debt securities with DHFL, triggering a crash in the housing finance firm’s share prices and raising concerns regarding the company’s liquidity position.

However, DHFL chairman & managing director Kapil Wadhawan termed the credit downgrading as “unwarranted”.

“The company is committed towards ensuring repayment of all its obligations as well as on-boarding the strategic partner for its business,” Wadhawan was quoted as saying. He said DFHL had already repaid debt obligations close to Rs 40,000 crore since September 2018.

DHFL has already sold strategic retail assets including Aadhar Housing Finance, Avanse Financial Services and DHFL Pramerica Asset Managers to get enough liquidity in order to meet its repayment obligations.