DHFL lenders likely to factor in a lot more than a highest bid – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/finance/dhfl-lenders-likely-to-factor-in-a-lot-more-than-a-highest-bid/articleshow/80144697.cmsSynopsis

With voting underway on three plans submitted by the Piramal Group, Adani Group and buyout fund Oaktree Capital in the hotly contested bankruptcy resolution, lenders are evaluating which one could pass muster on all three counts — financial, legal as well as regulatory — before they vote, said industry officials who did not want to be identified.

MUMBAI: As bankrupt Dewan Housing Finance (DHFLNSE -4.98 %) enters the last leg of the resolution process, creditors are weighing the sustainability of the business post the sale, where equity and financial structures are as vital to obtain regulatory approval as the quantitative assessment where the Piramal Group is said to have taken a lead.

With voting underway on three plans submitted by the Piramal Group, Adani Group and buyout fund Oaktree Capital in the hotly contested bankruptcy resolution, lenders are evaluating which one could pass muster on all three counts — financial, legal as well as regulatory — before they vote, said industry officials who did not want to be identified.

As per creditors’ quantitative evaluation, Piramal’s offer has received a score of 94 points to Oaktree’s 85 and 79 for Adani, said people familiar with the matter. When it comes to the equity portion, Piramal scores a full 10 while Oaktree gets 2.6.

In absolute terms Oaktree envisages a recovery of Rs 35,700 crore for creditors, Piramal’s is at Rs 35,250 crore and Adani’s at Rs 32,860 crore.

A key concern for lenders is said to be Oaktree’s submission of a rating company opinion which suggests a triple-A rating for its debt without disclosing which agency it was. Piramal Group entity Piramal Capital and Housing Finance is rated double-A.

“Apparent value is not everything,” said one of the creditors who has a vote. “If a bidder is offering you non-convertible debentures payable over a period of time lenders need to see how the company will be run during that period. Will it have enough equity to carry out operations during that period? The saleability of NCDs and secondary market liquidity should also be factored in.” The Oaktree proposal envisages issuance of NCDs to lenders.

The Piramal Group and Oaktree are contesting each other’s claims on being the highest bidder. While the highest number on paper may appear the best, the reality could be different due to payment terms.

Arpwood Capital is advising Piramal on the transaction.

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Unlike a corporate bankruptcy, resolution of a financial services firm is supervised by the Reserve Bank of India, which prioritises financial stability when it comes to rescue operations. While private equity fund JC Flowers submitted a bid for Yes BankNSE 0.00 %, the central bank eventually chose a consortium of Indian banks.

“While on paper Oaktree’s bid may appear the highest, it may not be in reality given that it is more a leveraged buyout on wafer-thin equity that could make it unstable,” said a creditor. “It may well be the practice in the West, but the RBI is still conservative and may not want a financial services firm that already went bankrupt standing on such a weak wicket.”

But Oaktree has threatened to take legal action against creditors if the process isn’t satisfactory.

Creditors also doubt that the indicated credit rating of triple-A for Oaktree’s debt is real, or is even maintainable given that rating companies are advised not to provide such signals.

Furthermore, even if Oaktree’s bid is to be considered favourably, it won’t meet the lenders’ need to close the deal soon as the insurance unit is a stumbling block.

Oaktree has proposed an Alternative Investment Fund structure to overcome the 49% cap on foreign holding, but the Securities and Exchange Board of India rules could delay and complicate that process.

Since the process is being conducted by the RBI-appointed administrator where financial stability also plays, Piramal Enterprises, with recent equity raisings of Rs 18,500 crore could be favourably looked at and a proposal to merge DHFL with itself is a factor that could comfort the regulator.

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