Understanding DHFL Problem for Beginners or Retail Investors

Before we deep-dived into DHFL or in broader term NBFC Issues let us try to understand simple terminologies in the debt market.

Bond: It is an instrument used by Banks, NBFC, HFCs to raise money from the market for their business.

Face Value and Coupon Rate: Every bond issue by these institutions carries face value and coupon rate. Face value represents loan by a particular debt paper and coupon rate represents interest paid on these bonds on face value every year till maturity.

For Example, A bond with Face Value 100 having 10% as Coupon rate will give investors every year Rs. 10 as interest till maturity and on maturity, Rs.100 will be given back.

Zero Coupon Bonds: As the name suggest it represents bonds with Zero Coupon Rates. Then the question is why investors should buy these bonds. The answer is, they list at a deep discount and then, later on, can be redeemed at par.

For Example, A bond with a Maturity value of 100 will be given to investors at Rs. 85.80 implying 9.15% Interest Rates. On Maturity, they can be redeemed at Rs. 100 thereby gaining Rs.14.20 at the end of every year.

Examples: Zero Coupon Bonds.

1. T-Bill issued by Govt. of India.
2. Commercial Paper Issued by Corporates. ( Like DHFL)
3. Certificate of Deposits by Banks.

All the above Bonds are issued for less than 1 year.

 DHFL Dilemma

As per Sources, the Company has issued commercial paper worth Rs 13500 Cr which is due for redemption by Dec end. Now to pay back the dues the company has two options:

1. Either roll back the dues of Commercial Paper to next year at higher rates.
2. Or Pay the dues on Dec.

The DHFL has only 3000 Cr cash in Hand.

So how they will able to meet out the obligation?

In a normal situation, they would have got liquidity from the market and they would have paid dues on time. However, due to the ILFS issue, the liquidity is not available in the market.

In anticipation of DHFL not able to pay their dues on redemption, DSP Black Rock Last month sold 300 Cr of Commercial Paper in the open market at discount to what they would have got had they redeemed at maturity.

Coming time would be very difficult for the company. Let us see how the management of the company cope up with the situation and how they will able to float the company in difficult times.

1 Comment

    The liquidity crisis looks easy for the company now. The management of the company is putting faith in the investors’ mind by buy backing Commerical Papers in advance. Today, UTI AMC has given a notice to all by claiming the following.

    UTI AMC communication

    Hi All,
    This is to inform you that DHFL has prepaid all our outstanding CPs ahead of their maturity. We have not “rolled-over” any CPs.

    As a result, now LCP (UTI’s Liquid Cash plan) , MMF (UTI’s Money Market Scheme), and TAF (UTI’s Treasury Advantage Fund) do not have any exposure to DHFL.

    This is a very positive news as fas stock goes. Let us see how it affects the price of stock in coming time.

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