LM: DHFL’s survival depends on how MFs, bondholders view its resolution plan

15 July 2019: It is ironic that a lender with the safest business of mortgages should become the most unsafe firm for its own investors.

It is no secret that Dewan Housing Finance Corp. Ltd (DHFL) is running out of oxygen to survive and its stock has already collapsed after the company indicated its days could be numbered. “These developments may raise a significant doubt on the ability of the company to continue as a going concern,” said DHFL, citing financial stress and downgrades, besides lack of funding, as factors behind the dire assessment.

What the company needs is funding and it needs it quick.

For that, lenders need to trust DHFL, which they don’t. The delay in publishing unaudited financial results for the March quarter shows that the trust deficit with investors is widening too. The company’s shares fell 29% on Monday after it reported huge losses for Q4.

DHFL’s loan book is in a mess and the surge in gross bad loans to 2.74% of the total loan book is the least of the problems. If one adds developer loans where cheques have not been banked, the stressed asset pool surges to more than 21% of its loan book.

For loans worth ₹20,750 crore, there are gaps in documentation. The company intends to monetize a pile of loans, which according to its estimates are valued around ₹36,000 crore. The fair value erosion is estimated to be ₹3,190 crore by DHFL.

Considering that the regulator highlighted gross divergences in assessing risk and, hence, capital levels, investors don’t believe the judgement of the management any more.

“The numbers are not believable when divergences are being talked about in the case of past numbers,” said an analyst at a global brokerage firm, requesting anonymity.

There are also concerns about DHFL’s pooled loans. The company pooled loans and sold them off to banks in its efforts to raise money. Most of them are said to be of the retail category.

(Graphic: Vipul Sharma/Mint)

But after Brickwork Ratings India Pvt. Ltd downgraded one such pool to “C” from “BBB” in June, a fresh concern now is whether these pools are kosher.

Trust is running low among investors and DHFL has not been able to raise any funds from the bond market, its go-to place up until September last year.

It had to sell stake in two of its group firms to generate money to pay off maturing debt, but a huge mound is still to be paid.

That said, inflows have reduced to a trickle and DHFL defaulted on its interest payments yet again last week.

Some analysts believe that lenders will have to take a haircut of 50-60% as part of any resolution plan.

“The erosion on DHFL shares is testament to the fact that investors don’t expect much. Perhaps some investors are willing to wait a week to see the resolution plan and, if it doesn’t materialise, the company’s life is at stake,” said an analyst on condition of anonymity.

Lenders have given until 25 July to the company to come up with a resolution plan. Will DHFL survive? That would depend on how banks, mutual funds and more than 86,000 bondholders view the plan.

The LiveMint reported

ET: NCLAT to hear ArcelorMittal’s plea on EPC Construction on August 8

15 July 2019: The NCLAT on August 8 will hear global steel major ArcelorMittal’s plea, challenging Royale Partners’ bid to acquire EPC Construction India Ltd (ECIL), currently under insolvency proceedings.

A three-member bench headed by Chairman Justice S J Mukhopadhaya has asked the parties to complete their pleading by filing their reply and rejoinder over it, and directed to list the matter on August 8.

The National Company Law Appellate Tribunal’s direction came over a petition filed by ArcelorMittal, which has challenged the order of the Mumbai bench of National Company Law Tribunal (NCLT).

The NCLT has rejected ArcelorMittal’s plea against bid of Royale Partners Investment Fund for ECIL, formerly Essar Projects India.

Earlier on May 16, passing an interim order, the NCLAT had said if any resolution plan is approved for the company, then it would be subject to final outcome of its order.

“During the pendency of the appeal, if any, plan is approved, the same shall be subject to the decision of this appeal,” the NCLAT had said.

The appellate tribunal had also issued notice to Resolution Professional and Royale Partners Investment Fund, directing them to file reply within two weeks.

The Economic Times reported

BS: Still want Bhushan Power, but reports of fraud a worry, JSW tells NCLT

15 July 2019: JSW Steel on Monday told the National Company Law Tribunal that the company is not backing out from the ongoing resolution process of Bhushan Power & Steel despite reports of alleged fraud by its former promoters.

During the proceedings in NCLT, counsel appearing for JSW Steel informed the tribunal that it was anxious about the alleged fraud reports and needs to know what is going inside Bhushan Power & Steel Ltd (BPSL).

A two member NCLT bench headed by the President Justice M M Kumar asked the Resolution Professional (RP) of BPSL to hand over a copy of the forensic report to JSW Steel.

NCLT said that alleged fraud reports will not have any impact on the insolvency resolution process and JSW’s resolution plan for BPSL.

NCLT has to take a decision over the lenders’ approval of the resolution plan of JSW Steel for BPSL.

Earlier on February 4, the National Company Law Appellate Tribunal (NCLAT) had dismissed the plea of Tata Steel and upheld the Committee of Creditors (CoC) decision to approve JSW Steel’s bid.

The NCLAT had said the CoC decision was well within its rights to negotiate better terms with resolution applicants and has had asked NCLT to decide over JSW Steel’s bid by March 31, 2019.

However, the judgement is still pending before the Principal bench of NCLT.

JSW Steel had revised its offer from Rs 11,000 crore to Rs 18,000 crore and later to over Rs 19,000 crore, whereas Tata Steel’s last offer was at Rs 17,000 crore after it had refused to revise its bid.

Last week, state-owned lender Allahabad Bank had reported fraud of over Rs 1,774 crore by BPSL to the Reserve Bank of India.

Earlier, PNB reported a fraud worth Rs 3,805.15 crore by BPSL by misappropriating bank funds and manipulating its books of accounts.

Around 85 per cent of PNB’s Rs 4,399 crore exposure to the company had been siphoned off.

Investigate agency CBI has already registered complaint in April names several other lenders.

According to the CBI, BPSL diverted around Rs 2,348 crore through its directors and staff from the loan accounts of PNB, Oriental Bank of Commerce, IDBI Bank and UCO Bank into the accounts of more than 200 shell companies without any obvious purpose.

The Business Standard reported

TOI: DHFL admits irregularities, warns it may not stay afloat

15 July 2019: Troubled housing finance provider DHFL has admitted to irregularities in recognising some income and in failure to monitor end use of some other loans. In the filing for its Q4FY19 results, the company has warned that it may not be able to continue as a going concern with funding drying up after a downgrade to ‘default’ category.

The company released its already-delayed results for the quarter ended March 2019 on Saturday, wherein it reported a loss of Rs 2,223 crore following provisions of Rs 3,190 crore toward fair value loss. The provisions were needed to reflect the fair value of loans worth nearly Rs 35,000 crore, which have been placed on the block by the company. These loans are nearly a third of its total financial assets of Rs 1.04 lakh crore.

The company said that it had been informed by the housing finance regulator that its capital adequacy should be 10.24% (and not 15% as computed by the company). This is below the statutory requirement of 12%.

These disclosures come after a series of bad news from the company, which began with an unexplained flash crash in its share price. This was followed by drying up of liquidity for finance companies in the wake of the IL&FS collapse. In January this year, the company faced allegations of irregularities in lending by a news portal.

Independent chartered accountants appointed by the audit committee to review these allegations highlighted procedural lapses and documentation deficiencies. These showed that end-use monitoring of the funds loaned had not been performed despite a specific mandate by the finance committee as part of loan sanction conditions. The company said that it will seek an explanation from the borrowers and might even recall the loans and is doing a fresh valuation of them.

DHFL has admitted that there are documentary deficiencies with respect to grant/rollover of inter-corporate deposits of Rs 4,018 crore, which are to be repaid, and Rs 1,307 crore that are being converted into secured term loan.

Lenders to DHFL, led by Union Bank and State Bank of India, in a meeting on July 1, 2019 said that they would enter into an inter-creditor agreement (ICA) among themselves. This is a pre-requisite for them to implement a restructuring plan. Unlike manufacturing companies, there is no scope for lenders to initiate bankruptcy proceedings against a financial services firm.

DHFL on July 1, 2019 had a meeting with the consortium of bankers, wherein the latter agreed to enter into an ICA for a potential restructuring of the company’s liabilities. DHFL’s debt liabilities include Rs 45,379 crore of bonds that it has issued and Rs 39,551 crore of borrowings. Besides this, it has Rs 1,135 crore of deposits. A bulk of the liabilities are with institutional lenders, largely banks.

According to lenders, DHFL has indicated that retail investors might get repaid first since these represent a larger number of creditors and a smaller amount of the total loan. “The company is in the process of submitting a resolution plan to the lenders and the lenders are expected to give an in-principle approval to the plan by end of July 2019,” DHFL said in its disclosure.

Times of India reported

ET: Jet Airways audit shows diversion of funds, fraudulent billing

15 July 2019: A State Bank of India commissioned forensic audit of Jet Airways books has revealed misappropriation of funds relating to provision of loans and fraudulent billing for JP Miles, according to two people with direct knowledge of the matter.

The report also highlights that invoices raised were not verified leading to excess billing and fuel expenses were raised substantially for Jet even when they remained static for other airlines.

“Provision has been made for Rs 3,353-crore loan given to Jet Lite over four years. Board resolution, shareholder approval for making the provision was not made available to the auditors,” the forensic audit conducted by EY says. ET has seen a copy of the report. “Loans were given to Jet Lite despite Jet Airways recording losses in fiscal year 2015 and declining profit over the years,” the report added.

The government had recently ordered a probe into Jet Airways for alleged siphoning off funds and for financial irregularities. The MCA ordered the SFIO probe under Section 212 (1) C of the Companies Act, based on its inspection report. The report indicated “prima facie” that the company was involved in “malpractices, mismanagement through siphoning off funds… preferential and related party transactions, prejudicial to public interest.”

The forensic audit also says that invoices raised on Jet Privilege were not verified, resulting in excess billing of nearly 1crore during July-September 2015.

Monthly invoice of Rs 15 crore was accounted for by Jet Airways for commercial activities without relevant documents supporting them. The report also says that the company was billed Rs 140 crore fraudulent JP miles leading to a loss of Rs 46 crore. Multiple other discrepancies were noted in the miles accrued versus what the company reported.

“There has been a systematic effort to siphon money from the company. In the limited analysis conducted it is clear that multiple methods were used to take out funds from Jet Airways,” said a person aware of the development.

SBI did not respond to an ET query. An official spokesperson for EY India said, “We are bound by our client confidentiality obligations and are unable to comment.”

The Economic Times reported