In This Issue:
- Editor’s Column – Credit Markets to Drive NBFC Sector Consolidation
- DHFL – High Leverage is the Issue
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Credit Markets to Drive NBFC Sector Consolidation
The IL&FS default and market panic on DHFL are causing a deep stress on credit markets. Yields on NBFC CPs and bonds have risen sharply across the board as mutual funds have turned risk averse and are one way sellers of most NBFC papers. The rise in CP and bond yields of NBFC issuers has lead to most fixed income schemes showing falling NAVs or generating very low returns that are leading to redemptions by investors.
Mutual Funds are not able to sell CPs and bonds to create liquidity to meet redemptions and this has prompted regulators to work with the market to improve liquidity.
The NBFC sector has seen a boom with many NBFCs driven by private equity emerging in the last few years and growing at a rapid pace, all funded by borrowings from banks, MFs and other institutional players. A few of them have over leveraged and these are in danger of being unable to roll over maturing debt. The rapid growth of assets in the last few years have also led to portfolios to be unseasoned and this can cause provisioning risks if borrowers fail to repay on time.
The rapid growth in the NBFC sector will start to falter in the coming quarters and this will lead to consolidating the sector with the healthiest companies that can change their borrowing structure to tap public deposits growing at the cost of weaker ones that are not able to raise institutional debt.
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DHFL – High Leverage is the Issue
DHFL is facing the markets risk aversion on credits due to its high leverage of over 10x. The housing finance company is adequately liquid and carries the highest safety rating and also has no issues in servicing its debt. However, post IL&FS, markets are looking warily at highly leveraged finance companies and DHFL is one of the highly leveraged ones.
DHFL stock price corrected by almost 50% in just a couple of days on leverage concerns, the market is also concerned about the rising cost of borrowing for the companies amid continuing financial crisis at IL&FS. The markets will force DHFL to deleverage and this will halt growth in the company, which is the primary reason for the sharp fall in valuations.
After the chaos, DHFL management said, we are sitting on strong liquidity, and we don’t have any delay in repayment, neither any default had occurred. Management also said promoters have not pledged any shares, and there is no intention of getting into loan against shares financing. Also, DHFL has no exposure to IL&FS.
On borrowing, management said- borrowing rate continues to be that for an AAA-rated company in the bond market. 8.65% is the incremental rate of borrowing (blended). Last month DHFL had issued CPs at 8.20%, while NCDs of different maturity (3,5,7 years) was issued at rates of 9.10%-9.30%.
DHFL Rating Profile – NCDs are AAA rated, while CPs are A1+ rated. As of 31st March 2018, bank borrowings comprised 42% of the total borrowings, NHB refinance 3%, market borrowings 40%, public deposits 11% and external commercial borrowings 3%.
Q1 FY 2019 Financial – DHFL reported a solid set of numbers in Q1 FY19, where profit rose by 35% to Rs. 4.35 billion (YoY basis) and interest income rose by 24% to Rs.30.24 billion (YoY basis). Gross NPA marginally declined to 0.93% while net interest margin rose to 3.44% from 3.31% a year ago. Loan book outstanding is at Rs 1009.85 billion in Q1 FY19 and Book Value per Share is at Rs 313.5.
Asset Quality & Ratios- as of 31st March 2018 DHFL reported Gross NPA ratio of 0.96% and Net NPA ratio of 0.56%. The Net NPA to Net worth ratio stood at 5.85% as of 31st March 2018. DHFL overall gearing is high at 10.54 x as of 31st March 2018. CAR and Tier I CAR stood at 15.29% and 11.52% respectively.
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