DLF, group co mop up 1,100-cr debt through rental discounting

DLF, group co mop up 1,100-cr debt through rental discounting
The Economic Times, April 10, 2009, Page 5

Sanjeev Choudhary NEW DELHI

COUNTRY’S largest property firm DLF Ltd and its promoter group company DLF Assets (DAL) have together raised around Rs 1,100 crore in debt from HDFC through lease rental discounting (LRD) of their properties. The fresh round of debt raising will ease cash flow at DLF.

A DLF spokesperson declined to comment on fund raising, but two senior company executives confirmed the raising of debt through LRD. LRD allows a property owner to raise funds against the expected rentals from that property in the future.

Privately held DAL has raised around Rs 800 crore while DLF Ltd has raised the rest. The fresh debt will help DAL pay DLF for the properties it had earlier purchased. As of December 2008, DAL owed Rs 5,400 crore to DLF.

DLF had earlier raised over Rs 3,000 crore in debt from Punjab National Bank (PNB), Life Insurance Corporation (LIC), State Bank of India (SBI) and Bank of India (BoI) between December and February, mainly to repay short-term debt.

DLF’s impressive sales and profit figures in the past several quarters were significantly based on its transactions with DAL, a company floated by DLF’s promoter KP Singh. Property sales to DAL contributed 43.5% to revenues and 35% of DLF’s profit before tax for the December ‘08 quarter. DAL, which has attracted investments from US hedge fund DE Shaw ($400 million) and UK-based Symphony Capital (estimated $650 million), was originally proposed to be listed on Singapore Stock Exchange as a real estate investment trust. The global economic downturn, however, forced DLF to change its plan last year and the company has since been trying to raise equity in DAL through private placement.

While announcing the December quarter earnings, DLF vice-chairman Rajiv Singh had said DAL will raise around Rs 2,000 crore through private equity deals. He said DAL would raise the same amount through lease rental discounting if equity deals didn’t materialise.

Market analysts see the rising receivables from DAL as the single-biggest concern for DLF. Meanwhile, DE Shaw is also looking at exiting its investment in DAL and any loss to it on account of a fall in market value of DAL has to be compensated by the DLF promoters.

As per JP Morgan’s estimates, DAL’s market value has fallen to $1.5 billion from $2.2 billion in 2007. In view of this, DLF is mooting three options aimed at extinguishing receivables from DAL and help DE Shaw exit DAL. First is to let DAL raise funds through LRD and pass that on to DLF, which would then use the money to buy DE Shaw’s investment in DAL.

Second option is to convert entire receivables into equity in DAL. This would mean DAL picking a majority stake in DAL. “DLF could look to buy a part stake in DAL at some stage, to provide a one time resolution of balance sheet debtors. This could be done via converting outstanding debtors on balance sheet to an equivalent stake at an appropriate cap rate,” J P Morgan said in a recent report. Third option being discussed by DLF management is to merge DAL with itself.

This may probably require DLF to raise debt to buy DE Shaw’s investment in DAL , following which DAL will be merged with DLF. The merger may entail DLF issuing convertible bonds to Symphony Capital. DLF can’t issue fresh shares to Symphony, a foreign investor, as the realty company is also executing many non-FDI compliant projects.