High exposure in DHFL bonds hit MFs, post delay in payments

The Dewan Housing Finance Company (DHFL) saga has come back to haunt debt funds. The housing finance company, which has been under liquidity stress for several months and whose debt instruments have been downgraded by rating agencies, has delayed interest payment on its bonds and bond repayments due on June 4.

Given that such delay in payments warrant mutual funds to mark down the net asset values (NAVs) of DHFL bonds by 75 per cent, debt funds stuck with high exposure to these bonds have been hit hard. The eye-watering fall of 30-50 per cent in the NAVs of a few schemes on a single day (on June 4), highlight the plight of such funds.

Shrinking corpus

Owing to the ongoing turmoil in the NBFC space, many funds — particularly with smaller corpuses — have found themselves in a pretty pickle. Persistent redemption pressures and outflows have led to their corpuses shrinking, increasing the concentration of DHFL bonds in their portfolios.

DHFL Pramerica Medium Term, for instance, that has taken the worst knock losing 53 per cent in NAV on June 4, held 37 per cent in DHFL bonds as of April. Holdings in such bonds in August 2018 (before DHFL-related concerns broke out) was just 9 per cent. As funds have been forced to exit the relatively better-rated debt papers to meet redemption pressures, concentration of DHFL bonds in their portfolios has gone up sharply over the past several months.

DHFL Pramerica Floating Rate Fund with holdings of 6.6 per cent in DHFL bonds in August last year, saw exposure to such bonds spike to 32-odd per cent in April this year. The recent mark-down in NAV due to delay in bond payments has hence, led to a 48 per cent fall in NAV in a single day.

Tata Corporate Bond Fund is another fund that has seen its holdings in DHFL bonds shoot up over the past few months, leading to a loss of nearly 30 per cent in NAV on June 4.

It’s important to note that the latest available information of the schemes’ portfolios is as on April. The concentration risk could have gone up further in the month of May resulting in such sharp mark-downs in NAVs.

More troubles ahead

Delay in payments technically does not constitute a default and DHFL has up to seven days to make the interest payment. It needs to be seen if DHFL is able to honour its payments on its non-convertible debentures (NCDs) within the stipulated time.

Our Mumbai Bureau adds: Rating agencies Crisil and ICRA on Wednesday downgraded commercial papers issued by DHFL. Crisil has downgraded the company to ‘default’ or ‘D’ category from A4 plus after the company missed interest payment on Tuesday. DHFL’s downgrade to ‘default’ is the first such action by a rating agency.

“DHFL has ₹850 crore of outstanding CPs of which ₹750 crore is due in June 2019. The first CP maturity is on June 7. With inadequate liquidity as on date to service debt and visibility very low on timely fund-raising, Crisil expects the CP to be in default on maturity,” the rating agency said. Crisil has further stated that many of the investors in NCDs with acceleration clauses have not yet exercised their acceleration rights. With the recent event, there could be a risk of acceleration, leading to increase in debt servicing commitments of DHFL.

Wadhawan Global Capital, which currently owns 37.3 per cent in DHFL, is the primary stakeholder. While DHFL had to stop premature fixed deposit withdrawals as a policy, in order to conserve liquidity, it had repaid ₹40,000 crore in financial obligation since last September.

Twelve debt funds currently (as of April) hold CPs maturing in June worth ₹295 crore.

The downgrade will further lead to a fall in NAVs of these funds. IDBI Ultra ST (7.5 per cent holdings in DHFL CPs), DSP Strategic Bond Fund (5 per cent), DSP Dual Advant-46-36M (4.3 per cent) and LIC MF Savings Fund (3.4 per cent) are some funds with relatively higher exposure to the downgraded CPs.