Sobha Developers gets FIs’ nod to restructure debt

Real estate major Sobha Developers has received in-principle approval from most of the financial institutions for restructuring of its debt. Mr J.C. Sharma, Managing Director, Sobha Developers, said that the company is “through with most of the banks, mutual funds and institutional investors for restructuring of our debt.” “They have looked into our revised cash flows and accordingly agreed to give us time,” he added.

Mr S. Baaskaran, Chief Financial Officer, said that the company now has extended the payment date by 12-18 months, for debts that were scheduled to be paid in the next 12-24 months.

“The ones that were scheduled to be paid after two years have not been restructured,” he clarified. The average interest rate is about 13 per cent, he said.

The company, which is in the process of restructuring its Rs 1,900-crore debt, plans to raise about Rs 900 crore through preferential equity, SPV-level equity and also through sale of a part of its 3,000-acre land bank. “We are looking at various options before us, and things are progressing well,” said Mr Sharma.

Mr Baaskaran said that the company hoped to raise about Rs 300 crore through preferential allotment, about Rs 300 crore through SPV-level funding, and the rest through sale of land. Through these measures, the company hopes to bring down the current leverage of 1.65 to less than 1 by March 2010.

He said that the company is also “planning two SPVs currently for our large integrated township projects at Pune and Kochi”. The Rs 1,000-crore project at Pune would see a development of 5.5 million sq ft spread over 110 acres, while the one at Kochi would see 38 million sq ft development spread over 450 acres at Rs 5,000 crore.

The company also expects to have “very comfortable cash flows for 2009-10”, thanks to its efforts to prune unnecessary costs and manpower, said Mr Baaskaran. While the company has adopted 10 per cent cut in salaries, there are also plans to downsize staff, if the situation warrants. “Things will improve from the third quarter of the next financial year. Prices won’t go up, but we will see better volumes; and with better volumes, the cash flow would be better,” he said.

The company’s contractual business is paying off well now, with 40 per cent of its revenues coming from this vertical.

“We plan to do business worth Rs 350 crore from this vertical in 2009-10, which would be 25 per cent higher than 2008-09,” he said.

SPV - Special Purpose Vehicle

As developers increase their footprint and expand their business five-fold, execution capabilities and finance have emerged as big challenges. Project related SPV have, in this scenario, emerged as viable options that are investment-related only to the project.

In an SPV, the developer ties up with a private equity fund who provides capital, or alternately, ties up with foreign developers who not only have capital but also bring in technical and execution capabilities. Several developers in Mumbai, Delhi, Pune, Chennai are looking at tying up with foreign developers. SPVs have picked up as every developer needs financial backing and the overall capability to manage, says Sanjay Dutt, Deputy Managing Director, Cushman &Wakefield. It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity.

Many developers are diluting a minority stake in their entity organization, or going in for specific FDI compliant SPVs for different projects. Dutt explains that there are developers developing SEZs/ retail/ hospitality / mixed townships who will accordingly choose partners who can bring in the requisite expertise in the different real estate segments. Then there are developers who have taken too much land but do not have the financial backing or expertise and are hence looking for partners in an SPV.

SPVs are the only way out in FDI projects, where you have a clear shareholder agreement and control in the project and exits becomes easier. According to Gautam Hora, Senior Manager, India Capital Market, Jones Lang LaSalle Meghraj, the foreign investor or fund wants to join hands with the local developer and an SPV is formed, so that any unsettled claims, litigations with respect to the existing entity are not carried forward.

Most large builders today have either tied up with funds or are scouting for joint venture partners overseas. Prominent real estate companies like DLF and Ansal API, have recently tied up with Dubai-based firm Nakheel and Deyaar, and are looking at more such deals. Through its joint venture with Nakheel, India's largest real estate developer DLF is planning to invest $10 billion in two integrated townships spread across 40,000 acres.

One of the earliest SPVs was the Emaar-MGF, joint venture company formed by Emaar Properties PJSC Dubai, the world's largest listed real estate company, and Delhi based MGF Developments Limited for an FDI project amounting to over half a billion dollars for projects with a capital outlay of US$4 billion (Rs 18,000 crore). Today there are SPVs galore, and some examples include the Runwal CapitalLand venture in Mumbai, Oberoi Constructions tie-up with Morgan Stanley, Keystone Group and Trikona Capital SPV for a Thane project of 127 acres.

The popularity of SPV in future will depend on lot of factors such global funding and domestic demand. However, both of these things appear to be not so encouraging.