An important stressed firm in India today is Dewan Housing (DHFL). They are a balance sheet of about Rs.1 trillion. They seem to have stock market returns correlations with a few other important firms (Yes Bank, Indiabulls Housing), and the cluster adds up to about a Rs.5 trillion balance sheet.Using current stock prices, the distance to default for DHFL is about 0. A few weeks ago, DHFL defaulted on one payment. However, there was a clause in that bond agreement which permitted slightly delayed payments without it classifying as a default. In a welcome development at the time. DHFL managed to find the money in time and that default was averted.There is news today that DHFL has defaulted on payments due on commercial paper. If the facts are accurately understood, then DHFL is likely to go into the status of default.From September 2018 onwards, DHFL (like many other firms) has faced a liquidity squeeze. New debt has not been forthcoming, and meeting repayment obligations has required asset sales and/or equity fundraising. Market conditions have been difficult and every repayment has been nerve-wracking for CFOs.It will not be a big surprise if DHFL has defaulted today. Its distance to default has been about 0 for a while. Creditors can do little, as there is no resolution procedure for financial firms. All that will change is that debt investors will carefully scrutinise NBFCs before extending debt, i.e. intensifying the difficulties of the credit market. In addition, there may be some adverse impact for the stock price and credit market access of the firms who have stock market returns that are closely correlated with DHFL.
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