DLF debt-reduction exercise is easier said than done

After years of talking about it, DLF might finally take some action in bringing down its accumulated pile of debt. News reports suggest that the promoters of DLF would infuse Rs 10,000 crore in the company through a preferential allotment. The promoters will be receiving this huge sum of money in lieu of sale of their stake in their rental business.

Reports say promoters KP Singh and his family will be selling 40% of their stake in the rental business and use the proceeds of the fund to repay part of the loan in the parent company.

The company’s stock has more than doubled in the past six months from a low of Rs 72 to around Rs 150 levels at present in anticipation of the proposed debt restructuring.

DLF has been selling complete businesses or stakes to reduce its mountain of debt, but has largely been unsuccessful in bringing down its debt pile. According to a Motilal Oswal report, the company has a debt level of Rs 23,500 crore in FY16 as compared to Rs 22,600 crore despite sales of various non-core assets.

The present step of a surgical cut was necessitated since the piecemeal approaches were not effective. The current restructuring will result in debt reduction and it will be done in two stages.

According to Motilal Oswal, DLF’s strategy is to restructure the ownership of its rental asset-holding subsidiary DLF Cyber City Developers Ltd (DCCDL), by selling the promoter’s 40% stake to institutional investors.

DLF’s promoters hold their stake in the form of compulsorily convertible preference shares (CCPSs) amounting to Rs 1,600 crore in DCCDL, which holds about 85% of the company’s rental portfolio. The CCPSs was created after DLF had merged the promoter-held rental assets with the rental assets of the listed entity in Dec 2009.

As per the two-step process, the promoters will first convert CCPS into DCCDL’s 40% stake which will be simultaneously sold off to institutional investors. The process, according to Motilal Oswal, has been initiated with the Information Memorandum already being circulated to the investors and expectation of interest likely to start coming in from June 2016.

In the second step, the promoters will infuse the divestment proceeds back into the parent company which will be used to bring down its debt level. As promoters already hold 75% in DLF, bringing in money as equity would go against the listing norm of promoter’s equity being not more than 75%. Since the issuance of fresh shares to the promoters (in lieu of the money they bring in) will increase their stake to around 80% it will result in significant equity dilution. This move of equity infusion has to be matched with either a corresponding sale of equity or a QIP (qualified institutional placement) to comply with the requirement for 75% promoters’ shareholding.

Though the process looks simple and straight forward there are some hitches. First, as pointed out by Adhidev Chattopadhyay of Elara Capital is the issue of valuation of the rental business. Chattopadhyay pointed out that earlier the figures doing the rounds was around Rs 6,000-7,000 crore now it is touted to be around Rs 10,000 crore. Unless the deal is sealed and signed, speculation of the deal price will attract interest in the stock alive.

Second point is reducing the stake in the parent company. Given the complexity of the transaction, DLF will have to find a buyer for the parent company and the subsidiary. Selling 40% stake in the rental business is the easier part as many investors will be keen on a business with a readymade cash flow. The haggling point with the investors will only be the net yield that the new investor would receive. The difficult part of the transaction and perhaps the most crucial part will be in finding investors who are willing to buy around 4-5% of promoter’s equity in DLF.

Though DLF post the restructuring will be a leaner company, given the condition of the real estate business in the country and with a real estate regulator in place plus affordable housing being launched, finding someone to bet on the parent company, especially after it has doubled in valuation in six months will be a tough task.

Though news reports have mentioned a time line for the deal to be executed, given the complexities involved the deal is not over till it is over.