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  • DHFL, IL&FS’ Friday horror show: Past, present and future tense

    Publish Date: September 24, 2018

    Keep calm. That’s the underlining message coming out of India’s central bank, securities regulator and the government following last week’s credit market bloodbath.

    While finance minister, Arun Jaitley, tweeted that the government would ensure “adequate liquidity is maintained/provided to NBFCs (non-banking financial companies)”, State Bank of India chairman, Rajnish Kumar, quashed speculation about State Bank of India being “wary” about lending to NBFCs.

    Both RBI and Securities Exchange Board of India (SEBI) issued a joint statement as well, stating: “Closely monitoring recent developments in the financial markets and are ready to take appropriate actions, if necessary.”

    But what compelled the bigwigs to issue such a statement?

    DHFL’s default rumors

    On Friday, there were rumors that Dewan Housing Finance Ltd. (DHFL) had defaulted on one of its debt obligation, which sparked a bloodbath in the financial markets. The rumor stemmed from the fact that DSP Mutual Fund had found it difficult to sell short-term DHFL papers. While the fund house wanted to sell the bond at 9-9.5%, they eventually had to give it out at 11%.

    As a result, DHFL shares tanked by more than 55%, which is the heaviest fall in 21 years. The fall had a domino effect on other housing finance companies.

    • Indiabulls Housing Finance plummeted 16.77% at Rs 962.55 at the end of the morning trading session. It eventually dumped by more than 20%.
    • Can Fin Homes fell 6.82% to Rs 286.80
    • PNB Housing Finance 4.24% to Rs 1,181.55
    • LIC Housing Finance 14.1%. to Rs 396.45

    Magma Fincorp (-15%), VLS Finance (-16.73%), L&T Finance Holdings (-15.81%), Crest Ventures (-15.66%), SREI Infrastructure Finance (-15.35%), Reliance Capital (-14.55%), LIC Housing Finance (-13.54%) also took a beating on the equity markets.

    All’s well, say DHFL and DSP

    The sharp plunge in the markets compelled DHFL to clear the air on Monday (September 24).

    Responding to speculations that they had defaulted, the management assured they have “enough liquidity" (about Rs 10,000 crore) to tide over short-term borrowing costs and that their ratings remained unchanged at AAA.

    On Friday, the company’s managing director, Kapil Wadhwan, had attributed the market’s flash crash to “rumour mills” and “panic” and categorically denied of any default. Speaking to BloombergQunt, he said he was taken aback by the market reaction because “there was nothing wrong with the fundamentals of the company” and that their portfolio was “extremely well diversified”.

    The only hint of worry, according to him, was to deal with the “difficulty in raising short-term financing as the rates have spiked” in recent days.

    DSP Mutual Fund also came out and explained that they sold Rs 300 crore-worth of bonds to calibrate its bond maturity strategy. Assuring that the sell-off was part of the plan, the fund house stated that they “sold securities” of various other NBFCs too in order to take advantage of rising borrowing costs.

    Indiabulls Housing Finance, another affected player, also lay the blame on “fear-mongering”.

    Ashwini Hooda, the company’s deputy managing director, had maintained that Indiabulls had a strong balance sheet and had enough firepower (Rs 20,000 crore liquidity) to withstand any borrowing rate hike for the next six months. He said the short-term borrowing rates were a healthy 7.7%, while the long-term rates were 8.8%.

    IL&FS debt trap

    Another reason for the sharp fall in stocks is the current fiasco surrounding IL&FS. The 30-year-old conglomerate finds itself in a debt trap because they don’t have enough money to repay its debtors.

    Its debts total about $12.6 billion.

    Their finances unravelled in public because they failed to cough up Rs 450 crore to Small Industries Development Bank of India (SIDBI).

    To worsen matters, the group is facing added pressure because short-term borrowing rates have soared in recent days to reach multi-years high.

    Related read: What sparked the IL&FS fiasco

    The current IL&FS spread panic in credit markets and the mutual fund industry, given some of the big players are exposed to the beleaguered company’s assets.

    That’s the reason why the RBI sought a meeting with the shareholders of IL&FS on September 28. The central bank wants to talk about the conglomerate’s finances and decide how to infuse capital in the strained company. The meeting will be held a day before the group’s annual general meeting (AGM).

    Market reaction

    The assurances have been made. And they seem to have worked, at least for now. While DHFL stocks rose 11.87% to Rs 392.15, IL&FS improved by 10.12% to Rs 22.30 on Monday.
    But fears persist. The fact that NBFCs are finding it difficult to borrow at competitive rates have raised liquidity concerns. While companies like DHFL and Indiabulls have claimed they have a large enough war chest to fight the current borrowing rates, the scrutiny on them is unlikely to subside any time soon. Ditto with IL&FS: the market will wait and watch the conglomerate’s borrowing plans in the next few weeks.

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