DHFL Crisis: With mutual funds on wait-and-watch for payments, will SEBI step in?
According to data on AceMF, 254 schemes had exposure to DHFL's and debt instruments with a total investment of Rs 6,122 crore across 25 mutual fund houses, as on June 06.
The mutual fund (MF) industry is on wait-and-watch mode regarding Dewan Housing Finance Ltd (
DHFL) as they await interest payment on bonds which were due on June 04.
A few fund houses said they would wait, but others are sceptical about DHFL’s capability to make the interest payment even after the seven-day grace period.
"DHFL has asked for seven days grace period and we have no option but to wait for the payment," said a fixed income manager from a private fund house on condition of anonymity, adding that they suspect the company may be unable to do so.
DHFL owed Rs 960 crore to mutual funds as interest payment towards its bonds. However, on June 04, the housing finance company missed its deadline to make Rs 1,150 crore payment to all bondholders and informed investors, that the payment would be done within seven days.
According to data on AceMF, 254 schemes had exposure to DHFL's and debt instruments with a total investment of Rs 6,122 crore across 25 mutual fund houses, as on June 06.
Given that such delay warranted mutual funds to mark down the net asset values (NAVs) of DHFL bonds by 75 percent, it led to a 30-40 percent single-day fall in NAV of schemes that invested in DHFL debt papers.
As a result, rating agencies cited the mortgage lender's deteriorating liquidity condition and downgraded its rating on commercial paper (CP).
DHFL’s MF arm—DHFL Pramerica Mutual Fund holds Rs 232 crore in debt securities of DHFL.
"The scheme which has given a negative 50 percent return is Medium Term Fund with a current corpus of Rs 11 crore. We are in the process of merging the scheme with a near similar mandate based on SEBI approval," DHFL Pramerica Mutual Fund told
Moneycontrol in an email response.
The fund house has also temporarily suspended fresh subscriptions in DHFL Pramerica Medium Term Fund, DHFL Pramerica Floating Rate Fund, DHFL Pramerica Short Maturity Fund, and DHFL Low Duration Fund.
"The Asset Management Company proposes to create a segregated portfolio of securities DHFL held by captioned schemes immediately after expiry of mandatory load free exit period of 30 days, subject to approval by Trustee of Tata Mutual Fund. Ongoing subscription in these schemes has already been suspended," said Tata Mutual Fund in a press release.
Tata Mutual Fund has allowed investors to exit Tata Corporate Bond Fund, Tata Medium Term Fund and Tata Treasury Advantage Fund without any exit load.
On December 28, the Securities and Exchange Board of India (SEBI) allowed MFs to create a segregated portfolio of debt and money market instruments in case of a credit event subject to certain conditions.
Default?
While DHFL says it cannot be called as default, fixed income mutual fund managers said it is a default.
"As the bond market works on the assessment of single day default. The grace is only for the debenture trustee to ascertain what is known as the event of default. So we have to treat it as a default and if they repay in the course of time you can write back the amount," Arvind Chari, Head –Fixed Income & Alternatives, Quantum Advisors said.
The missed default is followed by multiple downgrades of DHFL’s debt.
On May 14, CARE Ratings downgraded DHFL borrowings worth a huge Rs 1.13 trillion, just three days after rating agency CRISIL downgraded CPs issued by DHFL worth Rs 850 crore on May 11.
Of the total 254 schemes, 143 schemes have invested in DHFL debt instruments maturing in next four months.
The company has CP worth Rs 750 crore maturing in June 2019 with the first repayment on June 7.
DHFL CPS are maturing on June 21 and June 25, wherein total 12 mutual fund schemes have made investments. Repayments over the next two months are Rs 6,000 crore and collections from monthly payments are Rs 4,400 crore.
As per CNBC TV18 report, DHFL is likely to default on payments on non-convertible debentures (NCDs) worth Rs 1,150 due to liquidity concerns.
Cash crunch?
In order to ease the liquidity situation, DHFL and Wadhawan Global Capital have sold stake in many of their subsidiaries. The group has been working to bring in strategic investors and securitise its non-core housing exposure.
Reports say that DHFL is in talks with Oaktree Capital to sell off developer loans of Rs 17,000-18,000 crore.
In February, Wadhawan Global Capital (WGC) announced it was selling its entire 70 percent stake in Aadhar Housing Finance Ltd (AHFL), the affordable housing finance company, to Blackstone. DHFL, which held a 9.15 percent stake in AHFL, also exited the company.
Additionally in March, Wadhawan Global Capital entered into a definitive agreement with an affiliate of the Warburg Pincus Group to sell its entire 49.04 percent stake in education finance subsidiary Avanse Financial Services Ltd.
Will SEBI step in?
Now that DHFL Pramerica Funds NAV has fallen steeply by more than 40 percent, these DHFL funds are also the subject matter of SEBI investigation on whether intergroup investment limits were followed at all times in the DHFL group MF fixed income schemes.
According to SEBI regulations, the general investment limit is 10 percent exposure to single securities in a scheme. There is also a question on how NAV declined by 40 percent or more.
The next question arises as inter-scheme transfers of illiquid or insolvent securities are an industry practice which needs close examination in case of DHFL schemes and whether such activity concentrated the illiquid Dewan group debt papers in a few schemes.
So far, regulations that allow a grace period for payment do not categorise this event as default. MFs have been active this time to write down the delayed amount in NAV values.
It remains to be seen whether Dewan group can pay for the shortfall or it becomes another IL&FS saga.
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