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DHFL downgraded by Crisil, Icra on debt payment default

Crisil downgraded DHFL rating to "Crisil D" from earlier "Crisil A4+", while Icra downgrade happened from the previous rating of "Icra A4"

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DHFL downgraded by Crisil, Icra on debt payment default
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Global credit rating agencies Crisil and Icra on Wednesday downgraded the rating on the commercial paper (CP) of Dewan Housing Finance Corporation (DHFL), as the company delayed in servicing its debt due to inadequate liquidity.

Crisil downgraded DHFL rating to "Crisil D" from earlier "Crisil A4+", while Icra downgrade happened from the previous rating of "Icra A4". The rating has been removed from "Rating Watch with Negative Implications" by both agencies.

In a statement, Crisil said the downgrade reflects delays in debt servicing by DHFL on some of its non-convertible debentures (NCDs) because of inadequate liquidity. The payments were due on June 4, 2019. The NCDs are, however, not rated by Crisil.

DHFL has Rs 850 crore of outstanding CPs of which Rs 750 crore is due this month. The first CP maturity is on June 7. With inadequate liquidity to service its debt and visibility very low on timely fundraising, Crisil expects the CP to default on maturity.

Crisil downgrading came at a time when DHFL is in talks with financiers to help meet its Rs 1,000-crore-plus obligation within the seven-day grace period and prevent a default.

The statement further said that the scheduled aggregate cash outflows (including loan repayment and securitisation payouts) till July 2019 remains high at an estimated Rs 6,200 crore.

Crisil said it understands that many of the investors in NCDs with acceleration clauses have not yet exercised their acceleration rights. With this delay, it believes there is a heightened risk of acceleration, thereby materially increasing the debt servicing commitments of DHFL.

DHFL estimates collection from loan assets at Rs 2,200 crore per month.

This is the sixth time Crisil downgraded DHFL's CP since February this year. On February 2, Crisil placed "Crisil A1+/ watch negative" rating on DHFL's CP.

The rating agency said it has evaluated the standalone business and financial risk profiles of DHFL before arriving at the current rating.

As on December 31, DHFL's reported networth and capital adequacy ratio were Rs 10,750 crore and 17.74%, respectively (Rs 10,401 crore and 16.19%, respectively, as on September 30).

Return on managed assets, though stable at 1.3% during the first nine months of fiscal 2019, was lower than that of peers (reported return on assets was 1.4%), primarily because of intense competition resulting in low spreads, and high operating expenses on account of large branch network and small ticket size of loans, the rating agency said in its statement.

On a standalone basis, it had assets under management (AUM) of Rs 126,720 crore as on December 31 (Rs 130,182 crore as on September 30). In terms of AUM mix, around 57% loans were towards housing, 21% towards loans against property (LAP), 17% towards project loans and 5% towards loans to small and medium enterprises (SMEs). Based on reported numbers as on December 31, DHFL has low gross non-performing assets (GNPAs) of 1.12% (0.96% as on September 30). On a two-year lagged basis, GNPAs stood at 1.6% as on December 31.

"Given the pressure on fund-raising and liquidity at the industry level, asset quality in segments such as loans to SMEs, loan against property (LAP), and real estate developer loans will be the key monitorables going forward. That is because of the sensitivity of the borrowers in these segments to a prolonged funding crunch. So, while current delinquencies are not high if the funding situation for non-banks does not stabilise over time, asset quality challenges could manifest. However, DHFL's reported asset quality metrics have remained healthy till date," Crisil said.

It also noted that the current challenges in the overall credit profile of DHFL have not yet impacted collections. As per management, DHFL's current collection efficiency till March 2019 remains above 99%, in line with past trends. Further, their collections are primarily in non-cash mode and their ECS repayment return rates over the last six months are similar to pre-September levels. The agency will continue to monitor closely DHFL's collection efficiency and asset quality metrics, Crisil further said in its statement.

Rating agency Icra in its statement said though the company's borrowing profile is well diversified, the recent industry-wide stress in liquidity has increased dependence on securitisation ( approx Rs 17,000 crore raised between September 24, 2018, and May 10, 2019). Moreover, DHFL is dependent on the refinancing of maturing liabilities, given the relatively longer tenure of the loans inherent in the housing finance industry. While reliance on short-term borrowings through commercial papers has declined with the amount outstanding reducing to Rs. 850 crore as on May 10, 2019, from Rs. 8,715 crore as on September 30, 2018, the company would continue to depend on portfolio sales to meet its debt obligations till fresh funding resumes.

DHFL reported a net fixed deposit outflow of Rs. 1,356 crore during September 24, 2018, to December 31, 2018. The liquidity position of the company is also stretched as evidenced by the delay in meeting its debt obligation.

"The rating revision factors in further deterioration in the company's liquidity profile and delays in meeting scheduled debt obligation on June 04, 2019. While the mentioned debt is not rated by Icra, given the stretched liquidity profile and limited visibility on fresh funding, the company is unlikely to be able to service its debt obligation with regard to commercial paper programme in a timely manner," Icra said in its statement.

On Tuesday, shares of DHFL closed on BSE at Rs 111.60 per scrip, down 1.41% the previous close. On Wednesday, markets were closed due to Eid-Ul-Fitr.

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