Reprieve for DHFL’s FD holders as lenders go for ‘waterfall’

On Sunday (January 17, 2021), troubled mortgage lender DHFL informed the stock exchanges that the e-voting concluded on January 15 at 8 pm and that the resolution plan submitted by Piramal Capital and Housing Finance Limited (PCHFL) has been approved by the committee of creditors (CoC) by majority voting.

If accepted, it is likely to pave the way for a spectacular turnaround of the bankrupt firm two years after it was dragged to the insolvency process. But lenders are worried about further delays due to potential litigation.

“We are keeping our fingers crossed. We don’t know how Oaktree will react,” an official close to the resolution process told Fortune India. He said the match is still on, and many approvals and potential litigations are yet to come up.

Sources said the creditors have voted for the waterfall mechanism along with some preference to be given to small creditors with dues below ₹2 lakh. While all fixed deposit (FD) holders having less than ₹2 lakh will get their full amount, others will get it according to the distribution mechanism.

“We will seek approvals from the Reserve Bank of India (RBI) and the National Company Law Tribunal (NCLT). The whole process may stretch two-three months,” said one of the sources.

The voting for creditors in the virtual data room (VDR), spread over three weeks, was a little cumbersome as the resolutions ran into seven plans and five combinations. While Piramal’s resolution plan received 94% votes, the next closest bidder was the U.S.-based Oaktree Capital, whose offer received only 45% votes. Creditors representing 6.5% of the votes abstained from selecting any bidder. The resolution plan required at least 66% of the creditors to vote in its favour.

After a second meeting on Monday (January 18), the CoC is in the process of issuing the letter of intent to the Piramal Group. It also discussed the nitty-gritty of the resolution plan.

Fortune India on December 29 had reported that one can’t rule out a legal challenge to the first-ever finance company undergoing the IBC process.

According to the ‘waterfall’ mechanism, the proceeds from the sale of the liquidation assets of a corporate debtor could be distributed in a certain order of priority. Under the scheme, secured creditors have to be paid fully before any payments can be made to unsecured financial creditors, who in turn have priority over operational creditors.

Along with lenders, a huge number of FD holders, whose life’s savings are stuck for long, have been waiting for the process to get over. Their claims had added up to around ₹5,375 crore, with retail FD holders accounting for 40%. The total number of FD holders stands at 55,000.

Piramal’s proposal to offer 10% in addition to whatever consideration the CoC decides to offer the FD holders, its decision to retain all its employees, and the proposal to reverse merge DHFL with its financial services arm are believed to have tilted lenders’ votes in its favour. Lenders preferred Piramal’s transparent plan to a complicated one offered by Oaktree. Some lenders believed that Oaktree’s plan had some potential loopholes, including the proposed sale of the insurance joint venture.

While Piramal’s plan will require a final nod from the Reserve Bank of India (RBI) under the ‘fit and proper’ criterion, lenders are curious to know if Oaktree would take a legal recourse.

The resolutions that creditors were asked to vote for included comparisons of the bidders, both in terms of absolute numbers and upfront cash component, and in qualitative and quantitative formats. It also included proposals for splitting the proceeds using one of the available options—waterfall mechanism, pari-passu, or a fixed percentage share for unsecured creditors.

After sweetening the deal, Piramal had offered ₹37,250 crore in their resolution plan to DHFL’s creditors, including ₹12,700 crore in upfront cash. In comparison, Oaktree Capital offered a plan involving ₹38,400 crore, with an upfront payment of ₹11,700 crore. Piramal’s plan included ₹19,550 crore worth of non-convertible debentures to be repaid over 10 years while Oaktree had ₹21,000 crore worth debentures to be repaid over seven years. It increased its offer by ₹2,700 crore after the bidding deadline had passed.

Stock brokerage Jefferies India said loans given to DHFL are non-performing assets for banks and mostly fully provided for. “There may be a risk of litigation from co-bidders as some offered higher value. Deal may lead to 40% recovery and be marginally positive for lenders, PSUs (like Bank of India, Canara Bank, Union Bank of India) and private banks like YES Bank with higher exposure. DHFL’s loans of ₹950 billion [₹95,000 crore] compare with ₹520 billion [₹52,000 crore] of PEL.”

DHFL’s lenders and consultants are worried about Oaktree’s potential litigation. In a December 24-dated email to the CoC, Oaktree’s legal counsel and director, Frederik Grysolle, had promised to fight it out if its bid was evaluated based on unsubstantiated information. If Oaktree’s bid were to be evaluated on the basis of incorrect information or an erroneous presentation of the financial proposal, such evaluation would almost certainly be subject to judicial, administrative, and investigative review.

Grysolle had warned, in his email, that any such move would not be in the interests of financial creditors, FD holders, the broader Indian housing finance market, or the reputation of the Insolvency and Bankruptcy Code (IBC).

He had reminded the CoC that as guardians of public money and representatives of a diverse group of individuals (including many retail depositors and investors who are very vulnerable), discounting or failing to consider the upfront cash amount to the extent of ₹2,700 crore would disregard the IBC’s objective of value maximisation, and be open to challenge.

Oaktree retained the discretion in its resolution plan to attribute interest income between the approval date and the effective date for the benefit of the financial creditors (additional interest income). “We exercised this discretion in the December 24 email by providing additional interest income of ₹1,700 crore as upfront cash on a committed basis (irrespective of the amount of actual interest). This was made very clear in the email,” he had said.

Soon after the Oaktree email surfaced, a spokesperson of the Piramal Group had said, “The Oaktree bid is short on upfront cash, short on NPV, short on overall score, un-implementable due to insurance related complications, and leaves lenders with weak debt paper due to the sub-debt structure offered by Oaktree to themselves.”

Among lenders, State Bank of India (SBI), the lead lender, has the highest term loan and cash credit exposure of ₹8,328 crore as on September 30, 2018. DHFL is facing claims of ₹87,031 crore from lenders, including SBI. The others with large exposures are Bank of India (₹4,125 crore) and Canara Bank (₹2,681 crore).

After the bidders sweetened their respective bids, the bidding was believed to go for a close finish. However, the final numbers show that it was decisively in favour of the Piramal offer.