In recent days, many media have celebrated the completion of the acquisition of Deewan Housing Finance Ltd. (DHFL) by the Piramal group in the context of the bankruptcy proceedings. DHFL was one of the most infamous candidates to be resolved under the Indian Bankruptcy Code (IBC), with the promoter believed to have siphoned off an astronomical sum, possibly the biggest loot from the Indian business.
DHFL also marked the first case of a financial company referred to the IBC process. At over Rs 40,000 crore, the deal featured the highest public exposure on the company’s liabilities record ever, as it enjoyed a high AAA credit rating almost until the collapse.
To contextualize the case with some numbers, a summary of the company’s financial statements for the years ended March 2019 and March 2021 is presented below. March 2019 was the period immediately after Cobrapost’s exposure to fraud. March 2021 is the last year and the resolution came a few months after that time.
The figures in the table are aggregated and approximate for the convenience of discussion and not an accurate representation of financial details according to the annual report.
The media euphoria concerns banks as well as bond and deposit holders receiving a nice sum of money as a settlement. But the point is that a significant portion of the settlement, amounting to Rs 19,550 crore, is 6.75% coupon bonds payable semi-annually. The debentures are redeemable over a period of 10 years on a progressive basis. The cash settlement, according to reports, is just the sum of the balance, which conveniently uses around Rs3500 crore already in DHFL.
The haircut or loss to creditors is based on the gross settlement figure of Rs 37,250 crore. This is a mistake because Rs 19,550 crore, represented by a 6.75% instrument, cannot be valued at 100% of face value. For an AA rated company, Piramal Housing Finance Ltd, the market would never have subscribed to a 6.75% coupon on a 10-year instrument for an issue size of Rs 19,550 crore. There is a clear loss of value here, beyond the obvious discount taken by lenders on the base capital.
There have also been significant losses for holders of term deposits (FDs) and debentures in terms of loss of interest for over two years. All this is not taken into account in the calculation of the haircut.
What is the real acquisition cost for the Piramal group? Press reports suggest that they have hardly put any money on the table. They raised 19,550 crore rupees with new financial paper. About Rs3,500 crore is out of the money available in DHFL. Loans from Barclays Bank and Standard Chartered appear to have provided funds for the cash payment. Indeed, a bank substitutes the loans granted by another, and that too after a huge discount.
The loan portfolio has been written down as shown in the table. Even assuming 80% of the loss is allowed on the tax books, the cash benefit can be around 28% of, say, Rs 50,000 crore – this equates to a whopping Rs 14,000 crore. !
The Piramals won the favor of the Creditors Committee (CoC) by being authorized to issue bonds at a coupon of 6.75% for a period of 10 years. This in itself is a saving of 3 to 3.5% on the coupon for a comparable issue to increase Rs19,550 crore. The benefit over the term of the loan would be around Rs2000 crore on an approximate discounted basis. Sure enough, around Rs16,000 crore is the premium based on the nature of the acquisition and how the settlement was worked out.
The previous promoter had raised the problem that the collectibility of the loan portfolio had been grossly underestimated. Perhaps the man who was behind the leak is most likely to know the truth! A few more surprises on the positive side must be in sight for the acquirer, but nothing will be shared with investors who have lost heavily in trusting ratings. In short, and the inane CoC secured a one-sided deal giving Piramals big gains while doing a huge disservice to small investors like bondholders who got their finger tips.
In a carefully orchestrated narrative, the DHFL resolution can be celebrated as the conclusion of a high-value IBC deal, but the Piramals are the only winners at the end of the day!