In your interest.
Online Personal Finance Magazine
No beating about the bush.
The resolution plan (RP) as proposed by financially stressed Dewan Housing Finance Corporation Ltd (DHFL) will allow the company promoters to continue with the previous lending malpractices for another 10-15 years as there are no substantial cash outflows for the next 10 years, alleges a whistleblower.
DHFL's projected cash flows from project and mortgage loans have been mapped to liabilities, including term loans -3 (external commercial borrowings - ECBs) at Rs444 crore and non-convertible deposits (NCD)-3, including banks, National Housing Bank (NHB) and NCDs at Rs11,536 crore.
This amounts to Rs11,980 crore, and DHFL proposes to repay the liabilities over a 10-year period beginning FY19-20. In this case, an internal rate of return of 8.50% has been proposed with step-up interest rates.
The whistleblower calls this cash flow as accounting treatment. He says, "…they (DHFL) are proposing a 40%-50% write off of liabilities on NPV basis and most of these written off liabilities are also to be received in a longer time frame (10-20 years) irrespective of the current maturity of these liabilities. What this does is it allows the DHFL promoters to continue with the previous lending malpractices for another 10-15 years as there are no substantial cash outflows for the next 10 years. Also, if the conservative asset valuation by Ernst & Young (EY) proves to be wrong or understated, entire benefit flows to the promoters as they will continue to hold 10% equity stake post restructuring. Also, after write off of liabilities, they plan to bring a new promoter for selling their stake at the 'actual' fair value."
The RP has also left several depositors and non-convertible debenture (NCD) holders high and dry as the return on investment (RoI) is shown as nil. Even other lenders like banks, NCD holders, including mutual funds, insurance companies, and pension funds, ECB and NHB will have to buy 2.3% stake each at Rs54 per share in the debt-ridden company.
As per the RP, balance deposits after 31 October 2019 are proposed to be restructured over 10 years with nil interest rates. Even deposits payable till October 2019 end are assumed to be paid with existing interest rate.
Through the RP, DHFL proposes to convert 2.3% of each category lender's debt exposure into equity at an assumed price of Rs54 per share. On Monday at 2.26pm, DHFL, however, was trading 7.5% down at Rs39.10 on the BSE. So for lenders, who will have to already take a haircut as per the RP, this looks a loss-making proposal.
Banks have an exposure of Rs38,342 crore in DHFL. Of this, the RP proposes to convert 2.3% into equity at Rs54 per share or about Rs871 crore. For NCD-holders with an exposure of Rs30,616 crore, the conversion in to equity comes to Rs695 crore. Others, like ECB-holders with an exposure Rs2,747 crore, NHB at Rs2,350 crore, and holders of perpetual debt at Rs1,263 crore, commercial paper Rs100 crore, and subordinated debt of Rs2,267 crore, will also have to opt for the debt to equity conversion formula.
Interestingly, a few days back, out of the 87,000 debenture-holders, who had been asked to be party to DHFL's resolution plan being deliberated upon by banks, only 24,400 debenture-holders, or less than 30%, had responded before the due date of 25 September 2019, says a report from the Mint.
Banks have signed an inter-creditor agreement (ICA) to come up with a plan to restructure nearly Rs1 lakh crore of DHFL's debt and had been trying to get bond-holders on board as well for the plan to succeed, the report added.
However, from the RP, it is not clear, whether these lenders would accept the offer, especially as stated above, DHFL's price as on Monday is far below (Rs39.10) what is proposed in the debt to equity conversion formula (Rs54).
According to a whistleblower, public sector banks (PSBs) are trying hard for acceptance of the DHFL RP from all debtors. "If this resolution plan is accepted, the exposure to DHFL is not reported as an non-performing asset (NPA) and there is no requirement for provisioning. Banks will not have to do mark-to-market (MTM) of their restructured loans (unlike bond-holders) thereby the 'power of incentives' is working in the favour of acceptance of plan. Furthermore, what banks have done is they have specifically asked DHFL to further make payments up to 5 July 2019 from previous cut-off date of 25th June to avoid NPA reporting in their quarterly accounts. These payments to unsecured lenders have been done to the disadvantage of other secured lenders, completely arbitrary payment and against the principle of fairness and waterfall mechanism," he alleges.
He also alleges that DHFL promoters have stopped all payments and are, in effect, threatening the bond-holders that they will not be paid anything unless they sign on the resolution plan.
"The company is accruing cash flows every day which is being kept at PSU banks escrow account and even though the company has the ability to pay, it is happily committing wilful default as the idea is to get the liabilities written off. Also, their explicit threat is that no other recovery process will work as we will present this resolution plan only in every forum which is also accepted by PSU banks and you will also have to accept. And if you don't accept the plan, you will get a liquidation value today (which is discounting all the conservative cash inflows by a high discount rate of 15%) thus leading an even higher haircut of around 75%," the whistleblower alleges.