Ratings agency ICRA Ltd has downgraded the Rs8,000 crore commercial paper (CP) issued by Dewan Housing Finance Corp Ltd (DHFL) to A2+ from A1+ due to challenges faced by the lender in raising funds from traditional bank lines of credit and instruments. DHFL, however, has expressed concern over this downgrade and said the ratings agency ignored the company's committed efforts, positive intentions and fund raising initiatives.
In a release, ICRA said, "DHFL has been regular in meeting its debt obligations with repayments largely supported by sizeable securitisation and assignment of loan assets. With limited fresh business generation and sizeable securitisation and assignment of loan assets, the pool eligible for sell down has also been declining, thereby reducing the company’s ability to refinance through securitisation. While the present resources, along with monthly collections, would be adequate to meet the scheduled repayments till March 2019, the liquidity position could get stretched in case of any acceleration of debt by the lenders and/or higher-than-anticipated premature deposit withdrawals."
"The risk is further heightened by the moderate economic capitalisation levels, concentration risks arising out of 17% exposure (as a proportion of assets under management- AUM as on 31 December 2018) to the construction finance segment, a large part of which remains under construction/moratorium, and the reduced ability of DHFL to support fresh business," ICRA, a unit of Moody's, says.
DHFL, however, expressed concern over ICRA's re-rating of the company's CPs citing it is not merit-based and is unwarranted.
In a statement, Kapil Wadhawan, chairman and managing director of DHFL said "I am surprised with ICRA's rating action for DHFL's CPs which is not at all merit-based. This comes barely three weeks after the company was downgraded and kept on watch by all the rating agencies. Since then, no material event has taken place which would have compelled the rating agency to review the ratings in less than a month's time. This rating action has been taken in spite of repeated representations to the rating agency. DHFL's Commercial Papers ratings were reaffirmed by ICRA ratings in September 2018, followed by another revalidation in December 2018. The only paper that is rated by ICRA is the short term CP rating comprising of the remaining 2% and that too the outstanding amount is Rs1,525 crore. ICRA's uncalled-for action triggers question on the motivation of this rating action, especially when the company is slowly getting back to normalcy and has met each of its obligations on time. However we will take all remedial measures to protect the interests of all our stakeholders and continue to service all our obligations as we have done in this industry crisis since September 2018."
"The company extinguished almost 98% of its CPs and cleared obligations worth almost Rs18,000 crore till 31 December 2018 which included Rs9,965 crore of CPs. The total redemption for CPs till the month of August is Rs1,525 crore, which is not sufficient to permit this rating action. While fresh funding had practically dried down for the whole sector, only route to make cash available and lower our liabilities was through sell-down of wholesale or retail assets. Accordingly, the company sold down its strategic retail assets including Aadhar Housing Finance Ltd to ensure there is adequate liquidity. As a result, the company has sufficient cash reserves and investments today equivalent to about Rs4,500 crore," Mr Wadhawan says.
Talking about Aadhaar Housing Finance, ICRA says that while the stake sale has been announced by DHFL, this would be subject to regulatory approvals. DHFL has also been able to conclude sale of one of its construction finance loans amounting to Rs1,375 crore.
Noting the company’s plans to reduce the project loan book through portfolio sales, plans for selling its stake in non-core businesses and onboarding a strategic investor, ICRA says, DHFL’s liquidity position has been impacted by the prolonged challenges in raising funds.
According to the ratings agency, as on 31 January 2019, the company’s liquidity reserve stood at around Rs6,500 crore (including statutory liquidity ratio- SLR), which, along with monthly collections, would be sufficient to meet the scheduled repayments till March 2019.
"However," it says, in case of any acceleration of debt by the lenders and/or higher-than-anticipated premature deposit withdrawals, the liquidity could get stretched. Given the significant share of fixed deposits in the company’s borrowings, continued redemption of the same could worsen its liquidity profile. While the present resources would be adequate to make debt repayments till March 2019, given that the collection efficiencies from advances remain intact, the company would need additional funding to resume business."
ICRA says it will continue to monitor the progress on approvals for stake sale of non-core assets, company’s progress on onboarding a strategic investor as well as progress on sale of the project finance book and timely execution of these will be the key rating sensitivities along with its ability raise fresh funds and resume normal business.