New Delhi, Jan 4 : As the race for the failed Dewan Housing Finance Corporation Ltd. (DHFL) is coming to an end, banking industry sources claim that the likely winner, Piramal is interested in its merger only to cover up its struggling financial services business.
DHFL has a balance sheet of Rs. 80,000 crore. The two highest bidders for DHFL are Oaktree Capital and Piramal. The Committee of Creditors (CoC) is to choose one of the two but as per early indications even though Oaktree has put the highest bid, Piramal is likely to clinch the deal.
“The merger helps mask stress in Piramal’s wholesale book through consolidation,” informed sources in the housing sector said. However, sources said the deal “effectively, will be a bailout of Piramal Capital that helps banks who have exposure to both Piramal and DHFL, ever-green their exposure in the combined company in exchange for the large haircut they are taking of their DHFL exposure.”
It is not very different than the strategy that has been taken to tackle banking Non-Performing Assets (NPA) through Public Sector Undertaking (PSU) bank mergers, sources said.
Ninety per cent of Piramal’s financial services business is wholesale lending. A large majority of loan book is Real Estate (RE) developer loans which will require significant write-off, similar to DHFL wholesale loans, sources said.
There is delayed recognition of stress and therefore the balance sheet is not adequately provided for. Sources told IANS that Piramal is buying DHFL to recycle DHFL retail cash flows to service their huge debt against RE developer loans.
The liquidity crunch in companies with heavy exposure to developer finance loans has seen Non-Banking Financial Companies (NBFC) like Altico collapse in the last year.
These problems have not surfaced clearly and Piramal Capital still enjoys a strong credit rating as the Pharma business has historically subsidised financial services business. The group has continuously re-allocated equity from pharma to financial services to offset erosion of book value and maintain acceptable debt-to-equity ratios in the financial services business.
Given the slowdown in cash collections from the wholesale loan book, there has been high reliance on asset sales and cross-subsidies from sister concerns to support Piramal NBFC’s debt obligations, sources said adding that Piramal is getting support from the government through the Targeted Longer Term Refinancing Operations (TLTRO) scheme.
Piramal is also raising financing from Apollo at significantly high cost of 17 per cent, which shows the funding crunch in refinancing debt that is against mostly wholesale assets. Such high cost debt would erode net worth over time, a banking analyst said.
As of September 2020, gross NPAs stand at 2.5 per cent. Balance sheet stress or NPAs are under-stated. Of the latest balance sheet 67 per cent of wholesale Asset Under Management (AUM) took moratorium where recognition has not taken place. Real slippage performance, analysts claim will be December 20 and March 21 results.
There is Rs 10,000 crores goodwill asset on the balance-sheet of Piramal Capital. But Piramal Capital has significant single borrower concentration risk to highly stressed developers. Top 10 accounts (14.7k cr) represent 32 percent of the book of 45.8k cr, sources said.
The resulting “real” debt-to-equity ratio of the financial services business is significantly higher if accounted for goodwill and required write-offs on the wholesale book. After the asset sales executed over the last 12 months, there are limited remaining non-core balance sheet assets that are available to monetize to reduce debt.
“The CoC of DHFL should do an asset quality review of the Piramal entity which is being used for the merger,” an analyst said recalling that Ajay Piramal has stated in his letter on December 20, 2020 that Piramal NBFC is providing a INR 16,000 cr “equity commitment” as part of their plan.
“This statement only holds true if the assets are appropriately provided for on the books given there is substantial debt against the existing assets.” Even DHFL at one point had 11,000cr of net worth before stress in the books was finally forced to be recognized and eroded that net worth away leading up to National Company Law Tribunal (NCLT).
While Piramal claims “their plan does not envisage any junior debt held by Piramal or any provision to extract cash”, the post-merger entity would have Piramal inter-corporate borrowings which are present on the existing financial services balance sheet, the analyst said.
This could allow Piramal to re-allocate net worth between entities vis a vis build ups and redemptions of inter-corporate borrowings. Analysts point out that Piramal does not have a track record in acquiring and turning around distressed businesses. Bain Piramal JV did not take off, credit fund investments have not done well, an analyst recalled.
However, a Piramal spokesperson told media that such allegations are mischievous, misleading and malicious. “The CoC comprises some of the largest and most reputed financial institutions, including SBI, LIC, Union Bank, RBI and NHB. We have full faith that the CoC will take into account all legally valid bids submitted before the due date.”
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