DHFL may get a Rs 7,000-crore lifeline

MUMBAI: Dewan Housing Finance Corp’s (DHFL) lenders are considering Rs 7,000 crore in emergency funding to the debt-laden financier even as the creditors decide on the formula for conversion of debt into equity, which is a key part of the proposed restructuring plan.

Separately, mutual funds are unlikely to sign the inter-creditor agreement (ICA) for DHFL, citing a regulatory rider known as sidepocketing or segregation of stressed assets. Only Tata Mutual Fund, which has already complied with relevant regulations, has agreed to be part of the ICA.

The restructuring focuses on the wholesale loans the company has given to builders and also on some slum rehabilitation schemes. These are not generating cash flows to remain sustainable. Bankers said they are close to finalising a plan that could be put up for consideration of the company in the next few days. However, some issues — the price of debt conversion into equity, for instance – still need to be addressed.

“Around 45% of the company's outstanding debt is wholesale, which needs restructuring. The retail loans are sustainable and can be converted into three or four term loans at different pricing,” said a banker closely involved in the negotiations. “For the wholesale loans, the plan is to slice them into four parts, a term loan, some debt which is converted to equity, non convertible debentures (NCDs) of a slightly longer tenure and subordinated debt. The proportion and modalities are yet to be worked out.”

Bankers are debating whether to convert debt into equity and take majority stake in the company at around the current market price, based on the price formula of the Securities and Exchange Board of India (Sebi), or to do so at a token price of Rs 1 per share.

“There is a thinking among bankers that the Sebi price formula is not mandatory for restructuring of loans as the June 7 circular gives banks the option to do the restructuring as they deem fit. That is one decision yet to be made,” said a banker involved in the negotiations.

The stock ended at Rs 46.55 per share on Friday. Applying the Sebi formula for conversion would mean that the banks will have to calculate the amount of shares issued in proportion to the loan amount converted and the value of shares at current market price.

Lenders have, however, more or less made up their mind to infuse fresh funds into the company to ensure that the loans that are currently classified as SMA-2 (special mention account 2) do not slip into NPAs. SMA-2 loans are those where payment of interest is delayed for more than 60 days but less than 90 days, which is the cut off for classifying loans as NPAs.

“This loan that comes to around Rs 7,000 crore is necessary to keep the company afloat,” said a banker. “All banks have realised that this is necessary to keep loans sustainable. Otherwise, we will have to find a strategic investor to put money into the company.”

Banks have a Rs 35,000-crore exposure to the company through loans and also hold NCDs issued by the company. Bond holders, including mutual funds, insurance companies and pension funds, also have a Rs 45,000-crore exposure, which means the company owes its creditors a total of Rs 80,000 crore.

State Bank of India (SBI), Bank of Baroda (BoB) and Union Bank of India (UBI) are the top lenders to the company. Mutual funds collectively own nearly 10% of the total exposure. UTI, Reliance Nippon, Axis, Tata, Kotak, DSP, and Pramerica are some of the mutual fund houses that invested in DHFL debt securities. “All such funds should be allowed to sign ICA as they would get a pittance if DHFL goes into liquidation or gets mired in lingering legal battles,” said a large institutional investor, who declined to be named. Tata declined to comment on the matter.

A group of 34 lenders are said to have consented to the ICA. “Even if mutual funds … cannot sign the ICA, we will go ahead with the plan. They can still be part of the resolution process even if they do not sign the ICA,” said a banker involved in the restructuring plan.

“The risk is that may be some fund will go to court against the plan. But the funds also know that going to court will only delay the resolution and destroy value in the company. So we are confident that they will ultimately join us.”

Last month, SEBI permitted mutual funds to be part of ICA being signed by banks with defaulting corporates. But it came with a rider that asset management companies must segregate sticky assets through side-pocketing from performing investments.