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DHFL Default Crisis
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On June 4 DHFL missed its interest payments on certain NCDs. It downgraded to ‘default’ by all major rating agencies yesterday. CRISIL and ICRA assigned ‘D’ rating to companies commercial papers, anticipating a default, while CARE Ratings marked D, or default, to all long-term facilities, including public  NCDs of Rs 29,000 crore and fixed deposits of Rs 8,940 crore. Brickwork Ratings downgraded debt valued at over Rs 58,000 crore earlier in April.

Mutual fund investors holding debt of Dewan Housing Finance Corporation Ltd (DHFL) took the biggest hit. The net asset values (NAVs) of several debt schemes fell by 6-53 % on Tuesday, reflecting the marked-down value of their holdings in DHFL paper.

DHFL Pramerica Medium Term Fund, with assets of Rs 35 crore, saw its NAV plunge 52.99 %. The fund has the highest holding of DHFL paper at 37.42 %. Another scheme, DHFL Pramerica Floating Rate Fund — with assets of Rs 13 crore — saw its NAV plummet 48.4 %, with one-year returns dipping to 44.2 %. Tata Corporate Bond, which has assets of Rs 184 crore, saw its NAV fall 29.7 %, with one-year return at a negative 30.16 %. As many as 10 debt schemes saw their NAVs erode by more than 10 % on Tuesday.

About 22 mutual funds together owned DHFL paper worth Rs 5,236 crore across 163 debt schemes as on April 30, 2019. UTI Mutual Fund and Reliance Nippon Asset Management are among the largest fund houses holding DHFL paper.

Key implications

  1. High risk of debt outflows following haircut implying strong pressure on HFCs/NBFCs. Deep NAV cuts would mean new debt inflows will be stalled further since the AUM of debt mutual funds stagnated since August 2018
  2. The strong wholesale funding players are able to get the market share over medium term as incremental funding to this segment gets increased.
  3. NBFCs credit spread over G-secs could stay elevated for much longer even the one with good funding access.               

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