Lenders to Dewan Housing Finance Corp. Ltd (DHFL) are hopeful of securing majority support for a debt resolution plan for the distressed mortgage lender even as mutual funds abstained from signing an inter-creditor agreement (ICA), said Rajkiran Rai G., chief executive, Union Bank of India.
Rai said lenders, led by Union Bank of India, will soon vote on the resolution plan without giving specific timelines. The plan envisages conversion of debt into equity for lenders, giving them a 51% stake in the company. As on 6 July, the company’s total debt stood at ₹83,873 crore, of which ₹38,342 crore was owed to banks.
State Bank of India has an exposure of about ₹10,000 crore to DHFL, the bank’s chairman Rajnish Kumar told shareholders at its annual meeting in June. Other lenders to DHFL include Bank of India, Central Bank of India, Andhra Bank, Canara Bank, Punjab National Bank and Corporation Bank.
“We are waiting for certain clearances for the resolution plan. We have done our best to put a resolution plan across. We hope we can get the numbers (majority),” said Rai. For dissenting mutual funds yet to join the ICA, Rai said, getting the liquidation value can be one of the solutions but it has not been explicitly discussed.
“The Securities and Exchange Board of India has already given a go-ahead for mutual funds to sign inter-creditor agreements if they side-pocket their exposures,” he said, adding that since financial services companies are of value only as a going concern, liquidation will be detrimental. “If you get into liquidation, then everyone loses money and I hope better sense will prevail and everybody will agree to the plan,” said Rai.
Mutual fund side-pocketing helps separate risky assets from other investments and cash holdings. It ensures that money invested in a mutual fund liquid scheme, which is linked to stressed assets, gets locked, until the fund recovers the money from the company. Investors can redeem the rest of their money.
In August, DHFL said that its draft resolution plan submitted to lenders spares creditors from having to take haircuts on principal payments. Lenders are currently assessing the resolution plan under Reserve Bank of India’s (RBI) 7 June circular on resolution of stressed assets. According to the RBI circular, 75% of lenders by value of the total outstanding credit facilities to a stressed company and 60% by number must agree for an inter-creditor agreement to be binding on all lenders.
Meanwhile, acting on a motion filed by Reliance Nippon Life Asset Management Co. (now Nippon India Asset Management Co.), the Bombay high court on 10 October extended its previous stay on further payments by DHFL to its creditors except for payments made parri passu (in equal proportion) to all secured creditors. Following this, rating agency Icra on 15 October downgraded six securitized loan pools of DHFL.
Icra said the ongoing legal proceedings against DHFL might impact its ability to transfer the pool collections into the respective collection and payout (C&P) accounts of the rated transactions in a timely manner.
“In this particular case, there is a court stay on repayments and this rating action may be linked to that. There is a temporary order from the high court on distribution of collections. Otherwise, our pooled assets are doing very well. We are not seeing any NPAs there,” said Rai.