DHFL’s Debt Restructuring: The Fineprint

Stressed housing financier Dewan Housing Finance Corporation Ltd., which submitted a plan to its lenders last week, is hoping to reduce its existing loan dues by converting more than a quarter of its debt into equity-like instruments.As part of the resolution plan, the company said it is seeking a moratorium on repayments and fresh funds from banks and the National Housing Bank to restart lending activities. The plan does not include any haircut for lenders, the company said.Details of the plan, however, show that the resolution plan will mean a conversion of a large amount of debt into compulsorily convertible preference shares.According to two people familiar with the details, who spoke on condition of anonymity, DHFL is proposing to convert nearly Rs 25,000 crore worth of project loans into CCPS. The interest income on these project loans would have to be written off, while the principal amount would be repaid to lenders over 15 years, these people said.The debt being converted into CCPS includes project loans that are considered stressed and where the end borrower needs some relief or debt restructuring, the people quoted above said.DHFL had a loan book of Rs 89,387 crore as of March 31. As such, about 28 percent of its loan book will get converted into equity-like instruments should the plan be approved.DHFL’s loan book is funded by debt raised from banks and from the debt markets. The bank debt stands at roughly Rs 55,000 crore. State Bank of India and Bank of Baroda have the highest exposure to the company.While converting a part of the debt into CCPS, DHFL is also seeking a one-year moratorium on about Rs 15,000 crore in debt, the people quoted above said. This set of loans includes those that have been given for projects that are still reasonably healthy but may need some extension in debt schedules, the people explained.For the remaining debt, which is about Rs 50,000 crore given out to retail borrowers, has shown a good track record in repayments and doesn’t need any restructuring, the people quoted above said.DHFL, State Bank of India and EY did not respond to queries mailed on Friday seeking details of the restructuring package..Lenders To Debate PlanLenders are set to meet next week to discuss the resolution plan submitted by DHFL. The plan has been drawn up in consultation with EY, which is acting as the company’s adviser.While certain lenders have expressed reservations about the resolution plan, the large lenders are willing to discuss the plan further, the two people quoted above said. One of the concerns is whether the amount converted into CCPS will finally be realised. There is no clear road-map on how the converted project loans will be repaid and whether the borrowers will be able to honour their commitment, said one of the two people quoted above. On the flip side, options are limited since the company has no large assets that can be sold to ensure recoveries for banks.Under the RBI’s new rules, the lending consortium has a 180-days period within which it has to implement a resolution plan for DHFL. According to the Reserve Bank of India’s June 8 guidelines, if lenders are unable to find a resolution plan within the 180-day period, they would have to set aside penal provisions, which could hit their profits in the following quarters.DHFL cannot be referred for insolvency proceedings since resolution of financial services companies is not covered under the law yet. BloombergQuint had previously reported that lenders may consider taking over the company’s assets as an option of last resort.Role Of Mutual FundsLenders are also awaiting clarity from the markets regulator on the role of mutual funds, which have subscribed to non-convertible debentures issued by the housing finance company.The funds are yet to sign the inter creditor agreement, which would allow creditors to implement a common resolution for everyone involved. Insurance companies have agreed to come on board after the insurance regulator allowed them to sign these agreements.RBI Governor Shaktikanta Das, last week, said that it is in discussions with other regulators on this matter. If one set of creditors are not part of the ICA, the process becomes ineffective, Das explained.Under the ICA, if 66 percent of the lenders by value agree to a resolution plan, it becomes binding on all creditors. Dissenting creditors can sell their exposures to large lenders at a steep discount, if they do not want to participate in the plan.While DHFL hasn’t defaulted on bank repayments yet, it has delayed repayments on bonds. On Thursday, the housing finance company told stock exchanges that it won’t be able to repay its dues in the near future, as lenders are discussing the resolution plan it submitted.

DHFL’s Debt Restructuring: The Fineprint

DHFL has proposed to convert nearly Rs 25,000 crore in debt into equity-like instruments under its resolution plan.

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