DHFL is a HOT MESS right now. Why?

Dewan Housing Finance Corporation Ltd. is a home finance company which has caught itself up in a problem they did not see coming. So what's all the fuss about?

This is what normally happens:

You put your hard earned money in a low risk debt instrument (usually marketed by a mutual fund)  and forget about it for sometime because you know (or atleast you think you do) your money isn't going anywhere. DHFL comes and borrows money from a debt mutual fund for its HF loans. This keeps on happening periodically and the general understanding is that the company will repay your MF in regular intervals of time. End of story.

This is what has happened:

DHFL had a Rs.960 crores debt to repay of which it has repaid only Rs.30 crores bringing the outstanding amount to Rs.930 crores. 

Why did this happen?

 Asset Liability Mismatch.

How did this happen?

DHFL takes short term loans (borrowings) from YOUR mutual fund and does long term lending to retailers. 

Loans were being given out for a longer period of time ( housing loans for 10 years plus) but the frequency of borrowings was more in a shorter time span. Inflows became lesser than outflows. This kept on happening for quite sometime until the outstanding amount became a whopping Rs.960 crores (the makings of another Nirav Modi and Vijay Malya). 

So what's so bad about this anyways? Remember the Cross default covenant ? DHFL defaulted on only one loan which became the trigger for defaulting on other loans (netting to Rs.960 crores). Looks like they became a little too optimistic about a venture or didn't put much thought in it.

So why will this affect your mutual fund? They will repay right? They said so themselves.

Below is an excerpt from an article I read which explains the complexity of the whole situation:

• DHFL Defaulted – in the sense that they didn’t pay on time. Even one day, one rupee is considered a default by rating agencies. Which rates them “D”.
• If a Rating agency says DHFL has defaulted, all hell breaks loose.
• Because the rating impacts DHFL and all its bonds, regardless of whether their maturity or interest payment was due or not. Every DHFL bond is now “D”.
• Mutual funds are slaves to the rating agencies.
• I don’t mean this in a bad way, but that’s what it is.
• How? If an instrument is rated “D” (Default) then the mutual fund HAS TO take a hit.
• That hit is prescribed by SEBI.
• SEBI says for a financial company a “D” rating means a minimum of a 75% hit has to be taken.
• Meaning: If your mutual fund own Rs. 100,000 worth of ANY SERIES of DHFL bonds, even those that weren’t defaulted on, they have to mark it as if the bond lost Rs. 75,000 (So it’s worth only 25,000 now)

Every mutual fund that owned DHFL debt had to mark it down 75%. Some chose to mark it down 100%. This was why mutual fund NAVs fell.

Bad Luck