In a recent press release, UTI MF announced that it has decided to completely write-off its exposure to troubled Dewan Housing Finance Ltd. (DHFL) bonds in its schemes. Furthermore, the fund house has introduced an exit load in UTI Treasury Advantage Fund, UTI Ultra Short Term Fund, UTI Short Term Income Fund, UTI Dynamic Bond Fund and UTI Bond Fund for new investors to deter speculative action in the funds and to safeguard the interests of the existing investors.
As per the standard haircut table for sub-investment grade debt securities, UTI MF had earlier marked down the DHFL bonds by 75% after the troubled firm failed to repay the interest and principal payments of nearly Rs1,100 crore to its investors on the scheduled date.
Subsequently, on June 5, 2019, CRISIL, ICRA and CARE downgraded DHFL’s credit ratings to default grade. In light of this development UTI MF anticipates that there would be enhanced pressure and legal action on DHFL from all creditors, including exercise of early redemption clause and legal options by various lenders. This is expected to further delay the recovery efforts of the company in disposal of its assets in an orderly manner, UTI MF said in its statement.
Furthermore, there is no secondary market for such securities in the current scenario. Considering the high level of uncertainty as to recovery timelines and value, UTI MF has increased the markdown to DHFL debt securities from 75% to 100% in the schemes which has an exposure to DHFL. If there is any recovery in future, the provision will be written back to the scheme(s) on actual receipt basis.
The fiasco: where it all started
On 21 September 2018, the share price of Dewan Housing and Finance crashed 42% in a single after DSP Mutual Fund sold off Rs300 crore of DHFL’s bonds in the secondary market, at a higher yield. This started a snowball effect causing massive speculation and concern over DHFL’s financial health.
An expose by Cobrapost over DHFL’s promoters funneling bank loans worth several thousand crores into dubious and shell companies, without any security, further dented the company’s reputation.
Investors with any exposure to DHFL, either through their shares or exposure to debt paper, exited. Although the company clarified that all the allegations were wrong, investors turned a blind eye to it. These events made it difficult for DHFL to raise additional capital from the public and private investors, which skewed its liquidity profile.
Taking note of the liquidity crisis engulfing DHFL, credit rating agencies unleashed a series of downgrades on existing debt papers of DHFL. The downgrade panicked investors in debt mutual funds and others, which had purchased DHFL’s debt.
DHFL enjoyed the highest credit rating of AAA until September 2018, before the events unfolded. A gold standard AAA rating allowed DHFL to raise large sums of capital from investors, at a low rate. The ratings have now dropped to BBB- as on May 2019, nine notches from its prestigious AAA rating. The rating downgrades alone led to mark-down in the value of the debt by 10%-20%, suffered by investors exposed to it.
On 4 June 2019, the company missed its interest payment deadline on a set of outstanding bonds. This event triggered the deep losses witnessed in many schemes of mutual funds, which had exposure to DHFL. The Debenture Trust Deed allows a grace period of seven days within which interest payments can be made. The delay in payments will require MFs to mark down their NAVs by about 75% in the DHFL instruments.