Event:
Newspaper reports appear to indicate that Reserve Bank of India (RBI) has ruled out another round of restructuring for bad real estate loans. This is in response to banks seeking permission to continue classifying some bad real estate loans as standard assets even after developers failed to pay. The total outstanding loans of banks to the real estate sector stood at Rs 885.8bn as of November 2009.
In 2008, RBI allowed banks to restructure loans to both manufacturers and developers and continue showing bad loans as standard assets to save banks and developers from financial strain after the collapse of Lehman Brothers. However, this was for only those loans where the borrower was regular in repaying dues until September 1, 2008 and where the bank was able to restructure it by June 30, 2009.
Impact:
The suggested move is aimed at inducing developers, who are unable to meet their debt obligations, to bring down prices of properties and accelerate volumes to repay debt. The banks are wary of risk associated with commercial real estate loans as demand has not picked up. They are also cautious of residential demand tapering off as real estate companies have started increasing prices (given the strong demand momentum). As reported, RBI believes that the problem cannot be solved by repeated restructuring of loans, but through acceleration in residential volumes by maintaining prices (affordability being the key factor).
Our view:
We believe that the suggested move by RBI is to indicate caution as there could be a stress in the system. However, the impact may not be substantial as most of the real estate companies (post the last restructuring) have managed to raise fresh capital through QIP, share sale, asset monetization etc and utilized the proceeds to retire the debt due in FY10. Also, the companies have, in the last six months, refinanced their short term debt (maturities in FY10 & FY11) with longer tenure debt. Resultantly, we believe that the amount of loan which would be due for repayment in Q4FY10 and FY11 may not be significant and internal accruals of the companies (given the pick up in volumes in the residential space) will be sufficient to repay the same. However, there could be some concerns for companies that are lined up for IPO and planning to repay debt from the proceeds, if the capital raising plans do not go through successfully.
We do not see any major impact on our companies under coverage. Unitech is comfortably placed with ~13msf of area sold in 9MFY10 and ~Rs3.5bn of debt repayments in Q3FY10 purely from internal accruals. Unitech has ~Rs2bn of debt due for payment in Q4FY10 and ~Rs20bn in FY11. Similarly, DLF has sold ~8.5msf in 9MFY10 and has repaid Rs28.9bn of debt during the same period. DLF has ~Rs6.6bn of repayments due in Q4FY10 and ~Rs25bn in FY11. With strong cash flow visibility and asset monetization plans, we do not see any liquidity concern and believe that both the companies are in comfortable position to repay their debts maturing in the next 5 quarters.
Ramnath S / Vineet Chandak
ramnaths@idfcsski.
IDFC - SSKI Research
*Unedited.
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