DHFL drops 16% on default, contagion risk feared

After rating downgrade by global rating agencies due to delay in debt servicing, Dewan Housing Finance Corporation (DHFL) on Thursday tanked nearly 16%, hitting an over five-year low.

According to experts, the DHFL default looms risk for both non-banking financial services (NBFCs) and banking sectors with exposure to the housing finance companies.

The share touched an intra-day low Rs 91.50 before closing at Rs 93.90 apiece, down 15.86% its previous close, its lowest since December 2013. The share has fallen 86.73% since its 52-week high of Rs 690 on September 3, 2018.

Analyst Saurabh Rathi of IIFL Securities said the downgrade of DHFL’s commercial paper was the primary reason for the steep correction in markets today.

“Amid liquidity crisis, downgrade of DHFL’s paper could accentuate contagion risk, which can spread to other financial institutions including banks. DHFL’s default can expose Rs 1 lakh crore in borrowing to default risk. Banks, insurers and mutual funds have funded half of nearly Rs 1 lakh crore to DHFL, with PSU banks having a major contribution, besides some private banks like IndusInd Bank and YES Bank also have meaningful exposure to DHFL. Secondly, the banks may also see MTM losses on DHFL’s bond exposure, which may lower its earnings in the coming quarters. The stocks of PSU banks and wholesale lending NBFCs have been affected the most,” Rathi said.

Brokerage firm CLSA in a note said banks have funded half of this borrowing (i.e. Rs 50,000 crore, or 0.5% of loans), through a combination of loans (90% of total) and bonds. Additionally, they may have bought out portfolios through securitisation deals, but the risks are on ultimate/retail borrowers. PSU banks have been larger lenders to DHFL, including SBI, and among the private banks, YES Bank and IndusInd Bank have higher exposure.

Among non-banks, life insurers (especially LIC), mutual funds and pension funds are key financiers. DHFL also raised retail deposits of Rs 10,000 crore or 10% of total funds. Mutual funds (Rs 5,000 crore exposure/0.4% of debt AUM) will be the first to take MTM hits of as much as 75% (10%-15% was taken earlier). Among listed players, HDFC AMC does not have exposure and for Reliance AMC its sub-Rs 500 crore, or 0.5% of debt AUM. Banks will also face similar MTM risks on bond-books, but for loans, they will follow 90-days past overdue for NPLs and time-based provisioning that starts from 15%, the note said.

According to a manager with a fund house, the rating firms downgrade may result in a redemption pressure as investors’ sentiments will be affected. The redemption pressure on debt is likely to percolate on more such defaults in the market.

An expert, on condition of anonymity, said the fall in the net asset value (NAV) of the mutual funds with exposure to DHFL reflects 75% haircut on their exposure, as per current regulation. As mutual fund’s exposure to DHFL is partly secured, investors may not look to exit. However, if they look for redemption option, they will be booking losses, which is currently only a notional loss.

Another market expert said banks have a total exposure of 20-25% in NBFCs, including housing finance companies. The repayment delay by DHFL, with an outstanding of Rs 1.1 lakh crore, is bigger than the IL&FS default which was in the tune of Rs 90,000 crore, and still remained unaddressed even after 10 months of default. The banks, insurance companies, are likely to face similar impact, though the first brunt would be faced by the mutual funds.

Meanwhile, BNP Paribas MF in a statement said it has exposure to DHFL across six schemes via two bonds. The Zero Coupon Bond which was to mature on June 4 was marked down by 100% and the other with the maturity date of June 4, 2021 was treated as per valuation agencies and marked down by 75%. BNP Paribas exposure to DHFL was in the range of 1.7%-15.9% of net assets.