India gears up for first asset-backed property bonds

Oct 26 2013, 11:16 IST
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DLF is in talks to raise up to Rs 10 billion in a bond backed by lease rentals from two malls by the end of this year. (Reuters) DLF is in talks to raise up to Rs 10 billion in a bond backed by lease rentals from two malls by the end of this year. (Reuters)
SummaryBonds would open new source of capital for the sector weighed down by $22 bn bank debt

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.

"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.


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. 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.

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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