In the past few days, many media reports have celebrated the completion Deewan Housing Finance Ltd (DHFL) acquisition by the Piramal group under the bankruptcy process. DHFL was one of the most infamous candidates coming up for resolution under the Indian Bankruptcy Code (IBC), with the promoter suspected to have siphoned out an astronomical sum, perhaps the biggest loot in the corporate India.
DHFL also marked the first instance of a finance company being referred to the IBC process. At over Rs40,000 crore, the case had the highest ever public exposure to the company’s liabilities, because it enjoyed a high, AAA credit rating almost until the collapse.
To contextualise the case with some numbers, an abstract of the company’s financials for the year ended March 2019 and March 2021 is given below. March 2019 was the period immediately after the Cobrapost exposé about the fraud. March 2021 is the latest year and the resolution has happened within a few months of this period.
The figures in the table are aggregated and approximate for the convenience of discussion and not an accurate representation of the financial details as per the annual report.
The media euphoria is about the banks as well as bond- and deposit-holders receiving a tidy sum of cash as settlement. But the fact is that a significant part of the settlement, amounting to Rs19,550 crore, is by way of 6.75% coupon debentures payable half-yearly. The debentures are redeemable over a 10-year period in a phased manner. The cash settlement, according to news reports, is only the balance sum, which conveniently uses about Rs3,500 crore already in DHFL.
The hair-cut or loss to creditors is based on the gross settlement figure of Rs37,250 crore. This is a mistake, since Rs19,550 crore, represented by a 6.75% instrument cannot be valued at 100% of the face value. For an AA rated company, which Piramal Housing Finance Ltd is, the market would never have subscribed to a 6.75% coupon of 10-year instrument that too for an issue size of Rs 19,550 crore. There is a clear loss in value in this, beyond the obvious haircut taken by lenders on the basic principal.
There has also been significant loss to fixed deposit (FD) and debenture-holders in terms of loss of interest for over two years. All this is not factored in the calculation of the haircut.
What is the true cost of acquisition to the Piramal group? Press reports suggest that they have hardly put any cash on the table. They have raised Rs19,550 crore through new financial paper. About Rs3,500 crore is out of the cash available in DHFL. Loans from Barclays Bank and Standard Chartered appear to have supplied funds for the cash payment. In effect, one bank substitutes the loans extended by another, and that too after a huge haircut.
The loan book has been depreciated as depicted in the table. Even assuming that 80% of the loss is allowed in tax books, the cash benefit may be approximately 28% of say Rs50,000 crore – that works out to a huge Rs14,000 crore!
The Piramals have got themselves a sweet deal from the committee of creditors (CoC) in being allowed to issue bonds at a coupon of 6.75% for a 10-year period. This itself is a saving of 3%-3.5% on the coupon for a comparable issue to raise Rs19,550 crore. The benefit over the tenure of the loan would be around Rs2000 crore on a rough discounted basis. Effectively, about Rs16,000 crore is the bounty based on the nature of acquisition and the manner in which the settlement has been worked out.
The previous promoter had raised the issue that the recoverability of the loan book has been grossly underestimated. Perhaps the man who was the cause of the drain is most likely to know the truth! A few more surprises on the positive side must be in the offing for the acquirer, but nothing will be shared with investors who have lost heavily by trusting ratings. In sum, and inept CoC has ensured a one-sided deal giving big gains to the Piramals while doing a great disservice to small investors like the bond-holders who got the rough end of the stick.
In a carefully orchestrated narrative, the DHFL resolution may be celebrated as a conclusion of a high value IBC case, but the Piramals are the the only winners, at the end of the day!