 "Collateral damage: Banks will bear brunt if DLF fails to raise funds via asset sales")
The action of capital market regulator, Securities and Exchange Board of India (Sebi) on DLF, banning the company and its top executives for three years from accessing the capital market, will not have any immediate impact on banks, but will eventually hit the lenders if the cash flows of DLF worsens.
Until June, DLF has about Rs 19,000 crore debt on its books. Several large banks have lent to the real estate company, given the top credit rating it enjoys and healthy cash flows. Firstbiz couldn’t ascertain the individual bank exposure status.
Even with the Sebi ruling, DLF will not have immediate problems on its financials immediately, since it can service the debt for some more time. But the situation can change drastically if the sales do not pick up and cash flows are hit on account of a slowdown in demand in the real estate market.
Typically, a developer gets money through three channels - promoter funding, equity investments and debt (mostly bank loans). In this case, the equity window is closed for DLF for three years.
Given the revival in Indian equity markets, most companies have been trying to replace their accumulated debt burden with cheaper equity to lower the fund costs. Banks are also comfortable to lend to companies with strong equity base.
“Going ahead, servicing the debt can be an issue for DLF if the asset sales do not pick up,” said Sushil Muhnot, chairman and managing director of Bank of Maharashtra.
“This could be a concern to the banks, which have exposure to the company, since servicing debt could be an issue if cash flows do not come,” Muhnot said, adding his bank didn’t have any exposure to the company.
Sebi barred DLF and its six top executives, including chairman and main promoter K P Singh, for “active and deliberate suppression” of material information at the time of its initial public offering.
Besides Singh, those barred from the markets include his son Rajiv Singh (vice-chairman), daughter Pia Singh (whole-time director), managing director T C Goyal, former CFO Ramesh Sanka and Kameshwar Swarup, who was ED-legal at the time of the company’s IPO in 2007.
On its part, DLF has insisted that it did not violate any laws and that it would defend its position against any adverse findings in the Sebi order.
Another blow in waiting for DLF could be a possible hit on its rating by credit rating agencies. A possible rating downgrade could further increase the borrowing costs of the company, which is about 13 percent now.
As the options to tap equity markets are closed for now, DLF will seek more support for its lenders. Lower rating kills the bargaining power of a company in front of its lenders.
On the other hand, banks themselves may not be keen to take more exposure to DLF for now if uncertainty grips its future cash flows.
“The Rs 19,000 crore debt size on its books is not a worry given the size of underlying assets with the company. But converting assets to cash flows and continuing debt will highly depend on whether the company manages to sell its projects,” said another banker.
“Going ahead, raising money will be an issue for DLF, therefore growth of the firm may get impacted. Its rating may also take a hit. But for now, there is no immediate problem for banks,” said Abhishek Kothari, research analyst at Quant Capital.
The Sebi order has also shut the doors for DLF to list a Real Estate Investment Trust to raise low cost funds for the next three years.
The only way out for the real estate major to avoid a crisis is to push its asset sales and generate as much as money to ensure that debt servicing is not impacted. That depends on demand in the real estate market.
If DLF fails to service its debt, bankers, already under pressure to recover money from defaulters, in all likelihood will pounce upon the firm.
A defaulter tag can only make things worse for the Singh family.