Reuters
Mumbai: Indian property firms, including DLF Ltd, are gearing up to sell the
country's first bonds backed by rental income from their office buildings and
shopping malls.
The bonds would open a new source of capital for a commercial property sector weighed down by $22 billion of bank debt and sluggish rentals, and come on the heels of new rules allowing developers to raise money through real estate investment trusts (REITs).
Property and infrastructure lender IDFC is at the most advanced stage, with plans to sell at least Rs. 300 crore in a debt security backed by lease rentals from an IT park in Noida, outside Delhi, and a special economic zone in Pune, said people involved in the discussions.
IDFC declined to comment.
The bonds would open a new source of capital for a commercial property sector weighed down by $22 billion of bank debt and sluggish rentals, and come on the heels of new rules allowing developers to raise money through real estate investment trusts (REITs).
Property and infrastructure lender IDFC is at the most advanced stage, with plans to sell at least Rs. 300 crore in a debt security backed by lease rentals from an IT park in Noida, outside Delhi, and a special economic zone in Pune, said people involved in the discussions.
IDFC declined to comment.
DLF,
India's biggest listed developer, is in talks to raise up to Rs. 1,000 crore in
a bond backed by lease rentals from two malls by the end of this year, the
people said. The developer has in the past talked about raising funds through
such a vehicle. Developer K. Raheja Corp is also pursuing an asset-backed deal,
but is proceeding slowly, Neel Raheja, group president, told Reuters.
Credit
Suisse and JP Morgan are among banks tapping property companies and investors
to gauge their interest in the structure, the people said. Both banks declined
to comment.
"Bankers have pitched deals for IDFC and DLF to us. We are assessing the risk of the product and waiting for the rating," said a senior fund manager who declined to be named because the talks were not public. He said IDFC was likely to issue the first such bond, within a month.
"Bankers have pitched deals for IDFC and DLF to us. We are assessing the risk of the product and waiting for the rating," said a senior fund manager who declined to be named because the talks were not public. He said IDFC was likely to issue the first such bond, within a month.
MORE LRD THAN CMBS
While the
bond structure is loosely referred to in India as a commercial mortgage-backed
security (CMBS), it differs from a CMBS in the United States or Europe, under
which lenders securitise mortgages on commercial property.
Rather,
DLF and IDFC's proposed bonds would be similar to so-called lease-rental
discounting (LRD), sold in a bond. Rental income is used to pay the interest to
the bond investor, while the principal is repaid at maturity, the people said.
In an LRD, the principal is amortised over the life of the debt.
Both DLF
and IDFC are considering bonds with 5-year maturities and an option to extend
the borrowing to 7 years. The debt would be issued by a special purpose vehicle
that owns the underlying property and would carry a credit rating independent
of the developer.
DLF's executive director of finance, Saurabh Chawla, confirmed the developer is looking at such a debt structure for its offices and shopping malls, but gave few details.
DLF's executive director of finance, Saurabh Chawla, confirmed the developer is looking at such a debt structure for its offices and shopping malls, but gave few details.
"We
are exploring the possibility," he said. "There are many such
programs that we have which we hope to complete over the next 6-9 months."
DLF earns
more than 20 billion rupees in rent every year, Chawla said. The company has
also been selling non-core assets to reduce its debt.
YOUNG DEBT MARKETS
Indian
property developers, typically family-run, usually rely on bank loans and
selling equity to fund their operations.
India's
corporate bond market has traditionally lacked the depth and liquidity to serve
as a major funding source for all but the highest-rated companies. More exotic
bond products, meanwhile, have failed to take off because of low investor
appetite and regulatory restrictions that prevent many investors such as
pension funds from buying riskier assets.
The search for new ways to raise funds comes after Indian developers gorged on cheap bank loans during a property boom in 2006-07, which was ended by the global financial crisis as well as high domestic inflation and interest rates.
The search for new ways to raise funds comes after Indian developers gorged on cheap bank loans during a property boom in 2006-07, which was ended by the global financial crisis as well as high domestic inflation and interest rates.
Demand for
commercial property in India has also weakened in some cities as corporate
tenants rein in costs by consolidating operations, according to a report this
month by CBRE.
IDFC is
considering an asset-backed security that yields 10.75 percent to 11 percent,
said those close to the discussions, below the roughly 12-13 percent interest
on a loan for a similar duration.
Property-backed
bonds carry risk, as issuers can default if lease payments are disrupted.
Defaults on mortgage-backed assets were a key contributor to the 2008 global
financial crisis.
The Indian market for property-backed bonds is likely to develop slowly. "The tap may finally open, but not in strong force," said Sandeep Singh, director of structured finance at Fitch Ratings in Mumbai.
The Indian market for property-backed bonds is likely to develop slowly. "The tap may finally open, but not in strong force," said Sandeep Singh, director of structured finance at Fitch Ratings in Mumbai.
Raheja
said his company is considering doing a deal in the next 3-6 months.
"Before we do it we want to make sure it goes right and therefore we are
not rushing into it," he said
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