Wednesday, June 18, 2008

Lenders up stakes

Real estate developers have been feeling the squeeze. Rising interest rates and slowdown have hurt sales, bringing down real estate prices 10 to 20 per cent across markets. Add in the rising steel and cement prices, input costs for developers go way up and the market meltdown has hampered their ability to raise funds at home or abroad. But it’s not misery all around, the least for lenders to Realty sector.

Promoters of Akruti, Omaxe and Sobha have pledged their shares with Indiabulls Financial Services, financiers like Dubai-based BankSarasin & Co and Credit Suisse as a liquid security for loans against properties.

Omaxe, it appears have an outstanding debt exposure of Rs.100 crore to Indiabulls Financial. On December 4, 2007, its promoters pledged 14.4 per cent stake as collateral with Indiabulls besides the security of assets and personal guarantee. Akruti City, has a net exposure of Rs 80 crore to Indiabulls. Between December 2007 and Feb 2008, Akruti's promoters pledged 10.62% stake with Indiabulls towards collateral. On September 11, 2007, Sobha Developers, which builds offices for IT major Infosys, pledged 7.81 per cent of the company's stake with Dubai-based Bank Sarasin & Co. A day earlier, the promoters had pledged 10.70 per cent with Credit Suisse.

I envy Indiabulls. If the realty markets don’t revive soon, the debt would become overdue and the lenders will promptly enforce their lien on the security including pledged shares. Then all they need do is sell them (to their own realty arm - Indiabulls real estate) when the market revives and recover many times over the sums they lent, assuming that it would be an arm's length transaction. So they get two birds with one shot. The finance arm recovers its capital + interest and the realty arm gets low price real estate going on fire sale. Wow - what a business!
Remember the times when our (erstwhile Developmental) Financial Institutions - IDBI and IFCI used to be in project finance and routinely accepted shares as collateral? Borrowers defaulted and they almost went under. But soon their fortunes improved when markets revived and they made a killing by selling those shares.

Indiabulls for that matter made no bones about its intentions. It had no charitable veneer of a DFI. It is a for-profit, perfectly private enterprise; Make money it will!

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