Sebi order to hit DLF's debt reduction plans

Real estate major DLF's wait to cut its debt could get longer because of the recent order by the Securities and Exchange Board of India (Sebi) banning the former from capital markets for three years.

Early last year, DLF had said it would reduce debt, which at that time stood at Rs 21,000 crore, to Rs 10,000-11,000 crore. In May this year, the company said its plans to cut debt would be delayed by two years, owing to subdued market conditions.

According to analysts, this is now set to be delayed further. Besides, the company's debt might also go up, given the current market conditions.

"The capital market ban could hurt DLF either in terms of delayed pace of construction at its projects or rising indebtedness over the course of the next three years," said Krishnan

A S V, an analyst with Ambit Capital, in an October 14 report.

DLF's net debt stood at Rs 19,064 crore as of June 30.

Another analyst, Adhidev Chattopadhyay of HDFC Securities, said: "Markets have already factored in that the debt of the company will go up. The debt will keep on rising unless they (DLF) make new launches, and the market recovers."

An email questionnaire to DLF did not elicit any response. A company source said the firm would look at new launches and sell non-core assets to reduce debt.

Bankers as well as analysts indicated that the realty major would have to face higher cost of debt if rating agencies downgrade the company's debt.

On Wednesday, CRISIL placed DLF's bank debt and non-convertible debentures under "rating watch with negative implications".

"We believe the capital market ban imposed on DLF is likely to drive a negative rating action and hence, raise the cost of incremental debt that the company raises until such time that the capital market ban stays in place," Ambit's Krishnan said.

According to a Mumbai-based analyst, who did not want to be named, the company's average cost of funds will go up by 150-200 basis points if its debt is downgraded by rating agencies. Currently, DLF's average cost of funds is believed to be 12.5 per cent, one of the lowest in the real estate sector.

"If rating firms downgrade DLF's debt rating, its risk perception will go up. Then, banks will ask for higher rate of interest," said Chattopadhyay.

According to a senior executive of a private bank, any bank that lends to DLF will need to do a proper analysis as there are serious concerns surrounding the company. "If they (DLF) are barred from accessing the equity markets, then concerns will arise on their refinancing capacity," he added.

According to Edelweiss Securities, refinancing DLF's total non-bank debt, which amounts to 45 per cent of its FY14 net debt, might come under pressure.

Analysts said DLF's plans to raise funds through instruments such as commercial mortgage backed securities (CMBS) and real estate investment trusts will also get delayed.

DLF's plans to raise Rs 3,500 crore through CMBS in one of the large special economic zones and a few other projects of smaller size, could be hit owing to the Sebi order, according to analysts.