Dewan Housing Finance Limited (DHFL) Chairman Kapil Wadhawan has said the company is not facing any solvency issues and is well on track with the non-convertible debentures (NCDs) pay-out.
Shares of Dewan Housing Financial Corp Ltd (DHFL) plunged 10 percent on Friday, extending previous session's fall, after rating agencies Crisil and Icra downgraded the company's Rs 850-crore commercial paper to ‘D’ from ‘A4+’ and ‘A4’, respectively. The ratings downgrade came a day after the mortgage lender delayed interest payment worth Rs 1,150 crore to the investors of NCDs.
According to DHFL chairman, terming the present crisis as a solvency issue is a misnomer. “I have heard some market experts talk about solvency issues, about DHFL being tagged with some other companies which have had similar problems from different sectors. We are a financial institution, we have underlying assets which keep on giving us cash flow even today. Now if you abruptly stop the lending activity for a large institution like us with more than Rs 1.25 lakh crore worth assets under management and expect us to start paying down the liabilities of all creditors, even a bank today would not survive,” Wadhawan told CNBC-TV18's Nisha Poddar in an exclusive interview.
Edited excerpts from the interview: We have been talking about the liquidity crisis which has hit the non-banking financial companies (NBFCs) sector. With your commercial papers being downgraded by the rating agencies, you now have lesser avenues for gaining capital for your business. Is it just liquidity or is it an issue of survival and therefore solvency?
Let me address this by saying that DHFL has been one of the largest housing finance companies in the country with a prime focus on the lower and middle-income segments in tier-II and tier-III markets. Incidentally, we are the largest contributor to the Pradhan Mantri Awas Yojana where more than 100,000 units have been financed by us over the last three years.
In September last year, we abruptly got caught into a liquidity jam. I am not talking about just DHFL, it was the sector as a whole, both the NBFCs and the housing finance companies (HFCs). From then on, all the market participants have found it extremely difficult to go out and raise fresh resources from the market.
Clearly, DHFL has had a strong history and standing with more than 30 banks in the country – whether it is in terms of term-loan borrowings or selling loans to them, which has been much appreciated by the participants since the quality of assets has been absolutely pristine. This has helped us from September to this today.
So far you have held on pretty well and you always took pride in saying that you have neither defaulted nor delayed. But you recently delayed and you are saying a cure period of seven days but that is being understood by the rating agencies as a default scenario tantamount to lack of confidence in your ability to service the further maturities as far as commercial papers (CPs) are concerned. So do you think it is a solvency question now more than liquidity? What went wrong in the last one month?
Firstly, it is not a solvency issue at all. I think this is a misnomer and I have heard some of the market experts talk about solvency issues, about DHFL being tagged with some of the other companies which have had similar problems from different sectors. We are a financial institution, we have underlying assets which keep on giving us cash flows even today and will continue to do so. Now if you abruptly stop the lending activity for a large institution like us having more than Rs 1.25 lakh crore assets under management (AUM) and expect us to start paying down the liabilities of all our creditors -- even a bank today in that situation would not survive.
The asset-liability mismatch has hit the entire NBFCs space and you are one of them. Now your sources of funds are very limited especially after downgrade, you yourself admitted that, is it now next to impossible?
I wouldn’t say that it is next to impossible. The company is firstly not insolvent, it is a solvent company. We continue to get cash flows, the actions taken by the rating agencies post January and starting from the first week of February, from where we were rated as AAA marquee housing finance company and within three and a half months downgrading it to D, I think there are big questions here to be asked even to the rating agencies.
I think the regulators have also asked them questions for not doing it. You have said that it is not a solvency question, it is still a liquidity issue. That was the big question that a lot of investors were asking. When we talk about the non-convertible debentures (NCDs), why the delay, what went wrong and are you sure of meeting your obligation within the seven-day cure period? Your CP of Rs 100 crore is set to be redeemed today, are you on track with that?
We are very well on track with that on that pay-out. It logically is a delay, it is not a default. We have raised money through various sources, primarily from the capital markets, debt markets – in the last three years, we have been focused on raising money through public issuance of NCDs, we have done three large public issuances there. Now this obviously was the first anniversary of the pay-out of the last issue that was done in June last year and that amount was about Rs 960 crore.
Yes, we have delayed the payment because, as I said before, any financial institution, if you cut all the supply of money, our raw material, it is never a situation where even a bank would not have asset-liability mismatch. If today banks were not allowed to have access to the repo window or their deposit lifeline was cut, I don’t think that banks would actually be in a solvent position. They would be hit with asset and liability management challenges to meet the obligations to their depositors.
You are talking about the problem, we all know now about the problem. You know it very well and you had been giving pacificatory statements that you will not miss the deadline, you will not default, you have avenues of resources, of liquidity. Let us focus on that. For NCDs, are you sure to get the money? The second bit is the shortfall of Rs 1,500 crore out of the inflow-outflow that you have for the month of June, how are you going to bridge this Rs 1,500 crore?
I would not simply look at this as a June issue. Let me also track back to what we have done.
We will come to the other months later. I have a wider horizon of three months till your deal that you are working on is consummated, that could give a huge amount of liquidity and solve most of your problems. But till then, will you survive is the big question that the investors are asking? There could be some shaken confidence as well.
I am sure the confidence must have been shaken and we have been voicing this liquidity concern in front of everyone. The only source of money for the last nine months has been selling down assets primarily retail assets to banks and banks have mopped up all those assets willingly knowing very well that the asset quality is extremely good. Now, clearly we had no other avenues other than to go out and sell down further assets and keep on servicing all our obligations. In fact, since September we have paid over Rs 35,000 crore of obligations both interest and principal.
Coming back to your question, we are extremely comfortable, we have spoken to the banks. The banks do believe that this is not an insolvency issue, banks know that there has been a challenge as far as the NBFC, HFC space is concerned which the Reserve Bank of India governor also mentioned in his statement post monetary policy. Yes, there has been a challenge and I guess for a large institution like us, clearly when the avenues are fairly limited, the only recourse you have is to go back to your same creditor bank who have been supportive in your growth phase to say, this is a problem, please help us get out of this. There are multiple things that we are doing on the ground in ensuring that there is equity available into the company. My holding company has sold multiple businesses in the process as well.
We had put out a story that you held a crucial meeting with your lenders yesterday. What came of that meeting? Is that Rs 1500 crore totally going to come from your already existing lenders? Are they backing you up at this time?
We have been engaging with the bankers on an everyday basis, it is not just yesterday. Even prior to this, on a weekly basis we have been keeping them updated as to what our status is.
They have come forth and are being very helpful in this time because they know that this is not an insolvent position.
What is the assurance that you have at this point?
Our understanding is, and this can be validated from the banks, that for the next three months till the time we consummate our transaction, we are hopeful of consummating that in the next couple of weeks. The diligence process is on and till the time it is done, the way we have been selling down our assets to repay all our obligations, that process will continue.
Next week Blackstone money for Aadhar transaction is likely to come to you, will that take care of NCDs?
Yes it will.
What about the rest of the Rs 650 crore of commercial paper maturity that is going to come up for redemption in the latter half of June, after Rs 100 crore today? So, this Rs 750 crore, have you made good of the amount required for this?
Let us not forget that we continue to generate more than Rs 2000 crore of cash accruals every month from our borrowers. That amount is significant to pare down liabilities and at the same time there is a mismatch and that is why we have got into this delayed position today. That is why the SOS with the banks that we do need funding lines on the back of the assets that we have to clear off the liabilities at least for the next three months and we are in a good position to do our deal successfully.
While you are selling down and securitising your portfolio in the interim to survive while the deal process is on, what is the kind of valuation you may get? Your portfolio will also keep changing. So how will the suitors really ascertain the value of the company? Is that a cause of worry, what will you be left with to sell, also will that be big enough and good enough?
Honestly, it is not just about the portfolio at hand, what is important is that DHFL franchise has been so strong, the platform is so strong. For us it is not about what is at hand, it is going to be about whether the company has the ability to go out, originate and lend.
Let us talk about the numbers today because that is exactly what the market really wants to know. Coming down to numbers I have been harping on this Rs1,500 crore short fall for this month and for three months, which at least will be the time you will take before the consummation of any promising deal, what is the amount that is an additional requirement and what are the ways to fund it?
The focus is on selling down assets. We have already earmarked the assets which we are going to give to the financial institutions to buy and these are good strong assets.
Worth how much could that be?
More than Rs 5,000 crore.
Your consortium of lenders are the ones who are going to take care of this?
Out of your Rs1,26,000 crore of book size which also contains off-book items, in that you could sell down another Rs 5,000 crore?
That is right.
Will it be securitisation or sell down? What is it that you are looking at right now?
At the end of the day we have been doing direct assignments all this while with the banking community. The assurance surely is that they will be supportive in this transition time. I say transition because as a family we have also decided that it is time to pass on the baton to somebody to run this beautiful franchise and take it to the next level.
What is the kind of structure you are looking at and who are the serious players that you have spoken to? How many term sheets are there right now and what could be the likely structure?
We have a few non-indicative term sheets. My intent was very clear a couple of months ago, we were out there looking for a strategic partner to come in and run the franchise. In line with that we have been talking to strategic, international investors.
We have heard that Apollo Global Management through its AION Capital Partners is also looking at it and there could be a term sheet that would have been signed. Lone Star has also looked at it and there are a few others as well; Oaktree Capital was looking at taking a part of your debt and even Piramal Enterprises was part of the talks. Where do we stand in terms of how many term sheets you may have got by now, who are the serious bidders?
This is a process, while we may have indicative term sheets in place, and I say indicative because there is a diligence process that has to go on, indicative interest in the business clearly is a very solid interest from some of the investors. We haven’t gone down the path of really determining what the overall structure will be and again that is quite price sensitive so I wouldn’t want to spell out today because we haven’t really gone to the board as yet with anything firm in our hand. But I must admit that we are looking hopefully to strike something in the next couple of weeks.
So there is a binding agreement that could come in a couple of weeks is what you are saying?
Surely, subject to the approval of my board and the shareholders.
So how much are you looking at infusing by way of this transaction for which you are saying that maybe in two weeks you could have a definite agreement?
The more the capital, the more the equity infusion the better it is. We are looking at anywhere between Rs 7,000-Rs10,000 crore of equity investment coming into the company.
That would be a majority stake sale is what you are looking at?
That is what we believe subject to regulatory approvals. That is exactly what the intent is.
As per the structure that you are conceptualising at the moment, you would stay on with the company and would you also have some managerial role to play post that, is that what we are discussing at this point?
We built this franchise, I have built this company thanks to my father who laid the foundation but post 2000 I have been at the helm of building not just DHFL but the larger group. It is unfortunate to see it getting dismantled the way it has in the last couple of months. But I would love to have a pie in the stake because it is not easy to run a large franchise like this. It is not easy to continue to keep focusing on the larger strategic aspects of the business. So I guess I will find a way in. I must admit that the management control is not going to be with me.
Is it going to be an equity buyout by issuance of fresh equity of the company for infusing cash in the company? We had heard about several structures being discussed including selling a part of the retail business or offloading a part of the more difficult wholesale business in your portfolio.
One thing for sure, we are not going to break the company up. Whatever discussions we have had with the potential investors who have shown interest is to basically put that on the table. They do believe that there is a lot of value addition that the wholesale book offers to the retail franchise. We all know that housing finance is a very low-margin business and to supplement that, a lot of NBFCs, HFCs have gone down the route of lending to the developer community. In the last couple of years it has largely been the non-banking space that has supported the real estate sector as a whole, it supported the housing, the commercial aspects of this business, so it is a lucrative business, it is good business. Obviously because of some of the liquidity challenges that the sector has faced in the last 8 months, it has been difficult to push through credit to that sector. However I believe that things will change.
What is the kind of comforting comments that you can give as far as the mutual fund industry, your investor community is concerned, when it comes to you meeting all your obligations in the coming months?
We have been fighting our way through since the last 9 months to meet all our obligations. One thing I can assure you in everybody’s best interest is that we will continue to do the same, we will continue to keep on ensuring that all my stakeholders, my creditors, my investors remain protected, including the small investors with DHFL, whether it is the public issuance of NCDs or fixed deposit holders, the biggest comfort is that we will be around. We will make sure that every penny is paid for.
What are the other issues that you could be dealing with right now because of the nervousness in the investor community? Are there investors reaching out to you for premature withdrawal of fixed deposits or any of the other acceleration clause that NCDs can utilise or any such pressure is coming on you because of the nervousness?
Investors will be worried about their investment but I again go back to the same situation that we are a solvent company, we have cash that keeps coming into the system.
Is that hitting you as well, is that also a point of worry right now?
The point is that we are already engaged with the investors, with the banking community as a whole, so they do understand the predicament. We believe that there is some sympathy for us as well. So, one fear that I would like to allay from everybody’s mind is we will be around and we will make sure that their interests which I believe are our interests are protected at all times.
Can you give me a more realistic target in terms of getting a definitive agreement and the timeline that you are working with for consummation of the deal so that money inflow comes in and some of your liquidity issues are sorted? Depending on my board, my shareholders, once the right proposal is with us, post the diligence we will obviously want to take it to the board, discuss it at the board level and take a final call. Hopefully we should be doing all of this before mid-July.