LENDERS PUSH BUILDERS TO START SELLING

Eager To Retrieve Their Money, Banks Ask Realtors To Sell Before A Major Crash; Cash-Starved Builders Have Few Options Left

FINANCIERS have started talking tough with Indian property firms in trying to salvage the money they had lent. "Sell-before-it's-too-late" is a point that some of the big lenders are driving home, while a few overseas funds which had committed equity investments in tranches have gone into arbitration to wriggle out of the promise.
    Most builders were prompt with interest payments till September 30. But lenders now fear that many would default in the December quarter or maybe even earlier. A large builder has already failed to pay interest to a foreign fund, which had purchased the structured securities at the peak of the property boom.
    Banks and institutions have lent over Rs 75,000 crore to Indian builders. This does not include around Rs 25,000 crore worth of bonds and debt papers which mutual funds had bought. While the total value of
land and properties held as collateral is more than the outstanding loan, it's still cold comfort. If builders start defaulting in a big way, the lenders will be left holding huge tracts of land amid crashing property prices.
    "In the past few weeks, we have had several meetings with builders... we are telling them to reprice the properties, but many are in denial mode. They still think that properties can be pushed at earlier rates," said a senior officer with a large lender. The lenders said that in some cases, loans coming up for repayment in October and November will not be rolled over — a threat they feel could push some builders to sell properties at a lower price and service the loan interest.
    Some of the loans are on a rental discounting model, which means the builder pays the loan interest every month out of the rental income from commercial properties. For construction finance, the loan is cleared in equal quarterly instalments, where the amount — like individual home loans — consists of interest and part-principal. A more tricky situation is where properties are lying halfbuilt or have been nearly completed, but potential tenants like brokers and finance firms have backed out with the downturn in the market.
    But lenders know that they can't push too hard. "We are targeting to meet the borrowers separately to assess their respective cash flow positions. We have to take a caseby-case approach," said a banker. What's worrying them is the huge leverage in the real estate sector, with most builders bringing in relatively little money as their own capital to borrow big-time against land banks.
Investor backing out
    A large property firm has discovered that its foreign equity investor, an overseas fund, has frozen the investments which were committed for various stages of the project. The investor has now gone on arbitration on the ground that the builder did not stick to the agreed business plan. Little recourse for hedge funds who lost money
    LIKE most private equity players, the investor, in this case, had certain affirmative rights, which it has exercised to hold back the money. As per the plan, the builder had agreed on certain cost parameters which could not be met. PE firms insist on such clauses since they promise a floor internal rate of return to their investors. "Since the life of a fund is 6 to 7 years, they prefer arbitration to a court case. The builder feels that given the market conditions, the investor is using the business plan as an exit option... I think we will see more such cases in the coming days," said a officer with a legal firm.
Builder default on overseas paper
There are also disturbing rumours that a large firm has defaulted on the interest payment on the quasi-equity securities it had sold to foreign investors to raise money. These are pure loan structures, where the foreign investor had borrowed cheap dollar funds to buy these papers which had an interest coupon. The deal was done by a European firm, which soon sold off the papers to hedge funds.
    These hedge funds, operating from offshore tax havens, are now trying to dump the papers at a steep discount. The interesting part is that unlike Indian banks, these investors have no legal recourse to get the money back.
    "If a firm does this to an Indian bank, it would be blacklisted. But in the absence of a security mechanism, there's little the hedge funds can do," said a senior officer with a real estate fund. In several cases, these papers have a put option which gives the right to investors to sell the papers back to the builder at an agreed price. "But if the builder throws up his hands, the enforceability of the put option is also under question," said the fund manager.
    sugata.ghosh@timesgroup.com