Several real estate cos issue non-convertible debentures

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Several real estate cos issue non-convertible debentures

With banks tightening their purse strings, the real estate sector is starved for funds. And that has led to a spurt in the issue of non-convertible debenture by several real estate companies. CNBC-TV18 Priyanka Ghosh reports that this could mean a stress in cashflows.

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With banks tightening their purse strings, the real estate sector is starved for funds. And that has led to a spurt in the issue of non-convertible debenture by several real estate companies. CNBC-TV18 Priyanka Ghosh reports that this could mean a stress in cashflows.

Real estate companies, especially mid-sized ones, are set to pay a heavy price. With bank funding drying up, they have resorted to raising funds through non-convertible debentures or NCDs carrying a high coupon rate between 16 and 24%. While this is sharply higher than the average bank rate of 12-13%, real estate companies say they have no choice.

The NCD Deluge
Company                              Amount (Rs Cr)       Coupon Rate (%)

Puravankara Projects                             150                   16
Century Real Estate                              200                   20
Indiabulls Real Estate                            100                   12.3
Embassy Property Developers               135                   17.1
Rohan Builders & Developers                   50                   16.5
The 3C Company                                   100                   22
Adarsh Developers                                 100                   23.8

*Source: IIFL

The first nine months of FY11 saw six NCD issues from the real estate sector. But between January and April 2011, seven such issuances have hit the markets.

The most notable among them are Puravankara's Rs 150 crore issue at 16%. Indiabulls Real Estate's Rs 100 crore issue at 12.3%, Embassy Property Development's Rs 135 crore issue at 17% and Century Real Estate's Rs 200 crore issue at  20%.

These issuances have market analysts worried. They say the quantum of funds raised do not justify the rate of interest on offer.

Developers have traditionally raised NCDs with about a four year maturity period as a strategy to spread out their debt repayment schedule without compromising on borrowing costs. Not any more. And the higher rate of interest suggests that banks are reluctant to roll over maturing debt, or extend new lines of long term credit to these real estate companies.

A shortage of available funds from banks has also forced coupon rates on NCDs higher from 10-16% in early FY11, to 16-24% currently. Experts say this will hurt cash flows for real estate companies, and also make servicing the debt difficult going forward.