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Why Is Dewan Housing Finance Crashing? Research Team | Posted On Friday, June 07,2019, 03:15 PM

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Why Is Dewan Housing Finance Crashing?



The shares of Dewan Housing Finance Corporation or DHFL crashed by 16% in a single day. DHFL closed at Rs 93.90 on the BSE. The market capitalization of Dewan Housing Finance Corporation fell by a whopping Rs 555 Crores to just around Rs 2,946 Crores. DHFL had crashed by 60% in a single trading day in September. This was a time when most NBFCs including LIC Housing Finance, Gruh Finance, Indiabulls Housing Finance, Repco Home Finance and Bajaj Housing Finance had crashed.  Now to the big question? Why is Dewan Housing Finance crashing?

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Why Is Dewan Housing Finance Crashing?

The shares of DHFL have crashed a further 8% on Friday, So what is going on? The credit rating agency Crisil downgraded the commercial paper or CP of Dewan Housing Finance from A4+ to D. The reason for this? A delay in servicing the debt.

There has been a default in paying interest on over Rs 900 Crores of bonds on 4th June 2019. The Mutual Fund industry is on wait-and-watch mode, as DHFL defaulted on the bonds. Dewan Housing Finance has asked for a 7 day grace period, to make the payments. Many mutual funds are sceptical, but have no choice, but to wait.

Dewan Housing Finance owed around Rs 960 Crores to mutual funds in interest payments towards its bonds. Sadly, DHFL missed the June 4th deadline towards making payments of Rs 1,150 Crores to bondholders and seeks a 7-day grace period, to do so.

Mutual Funds Crash Because of DHFL:

Rating firms ICRA, CARE and ICRA downgraded DHFL debt instrument to ‘default’ rating. Around 254 debt fund schemes had exposure to Dewan Housing Finance debt to the tune of Rs 6,122 Crores as on June 6th 2019. Mutual Funds were forced to mark down the NAVs (Net Asset Value) of DHFL Bonds by 75%. This led to a single-day fall of 30-40% in NAVs of schemes which held DHFL debt paper.

This is causing a crisis in the NBFC sector. After the IL&FS fiasco and the credit rating downgrade of DHFL debt, several brokerages prefer private sector banking stocks over NBFCs.

Many mutual funds which hold DHFL debt in their portfolios have stopped accepting fresh subscriptions to these schemes. They are seeking clarity on DHFL payment plans. DHFL Pramerica, Tata Mutual Fund, Baroda Mutual Fund, DSP Mutual Funds and BNP Paribas have suspended schemes which hold DHFL debt.

Why is DHFL Crashing?

Rating firms have noticed DHFLs modest capital and earnings. Its return on managed assets is lower than its peers. This is because of intense pressure in the sector. DHFL has a large number of branches which mean high operating expenses and also the small ticket size loans, are putting pressure on earnings.

As DHFL defaults on bond payments, the Company has refused to call this as a default. The bond market works on the principal of a single day default. So, technically this is a default. This is why DHFL is crashing.

DHFL is badly in need of liquidity, and seeks strategic investors. DHFL is in talks with Oaktree Capital and would sell developer loans of around Rs 17,000 to 18,000 Crores.

Wadhawan Global Capital the parent Company of DHFL, announced that it was selling the entire 70% stake in Aadhar Housing Finance (an affordable housing finance Company) to Blackstone in the month of February. DHFL is in rescue mode. They are in the process of selling their education loan Company. So, DHFL may just get through this crisis.

Should You Exit Mutual Funds Which Hold DHFL Debt?

Don’t exit these debt mutual fund schemes, unless you have a near-term goal. Then, you definitely must redeem the debt fund and make a hasty exit. If you are around 6 months to a year away from the near-term goal, take losses and redeem the mutual fund. Otherwise, wait for the rescue attempt, which will surely come along.

See Also: Everything You Need To Know About Mutual Funds

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