DLF, DAL raise Rs 1,100-cr debt from HDFC Bank

The country’s largest property firm DLF and its promoter group company DLF Assets (DAL) have together raised around Rs 1,100 crore as debt from HDFC Bank through lease rental discounting (LRD) of their properties. The fresh round of debt raising will ease cash flow at DLF.
A DLF spokesperson declined to comment on fund raising, but two senior company executives confirmed the raising of debt through LRD. LRD allows a property owner to raise funds against the expected rentals from the property in future.
Privately held DAL has raised around Rs 800 crore while DLF has raised the rest. The fresh debt will help DAL pay DLF for the properties it had earlier purchased. As of December 2008, DAL owed Rs 5,400 crore to DLF.
DLF had earlier raised over Rs 3,000 crore in debt from Punjab National Bank (PNB), Life Insurance Corporation (LIC), State Bank of India (SBI) and Bank of India (BoI) between December and February, mainly to repay short-term debt.
DLF’s impressive sales and profit figures in the past several quarters were significantly based on its transactions with DAL, a company floated by DLF’s promoter KP Singh. Property sales to DAL contributed 43.5% to revenues and 35% of DLF’s profit before tax for the December 2008 quarter.
DAL, which has attracted investments from the US hedge fund DE Shaw ($400 million) and UK-based Symphony Capital (estimated $650 million), was originally proposed to be listed on the Singapore Stock Exchange, as a real estate investment trust. The global economic downturn, however, forced DLF to change its plan last year, and the company has since been trying to raise equity in DAL through private placement.
While announcing the December quarter earnings, DLF vice-chairman Rajiv Singh had said that DAL will raise around Rs 2,000 crore through private equity deals. He said that DAL would raise the same amount through lease rental discounting, if equity deals didn’t materialise.
Market analysts see the rising receivables from DAL, as the single-biggest concern for DLF. Meanwhile, DE Shaw is also looking at exiting its investment in DAL and any loss to it on account of a fall in market value of DAL has to be compensated by DLF promoters. As per JP Morgan’s estimates, DAL’s market value has fallen to $1.5 billion from $2.2 billion in 2007.
In view of this, DLF is weighing several options aimed at extinguishing receivables from DAL and help DE Shaw exit DAL.
First is to let DAL raise funds through LRD and pass that on to DLF, which would then use the money to buy DE Shaw’s investment in DAL.
Second option is to convert entire receivables into equity in DAL. This would mean DLF picking a majority stake in DAL. “DLF could look to buy a part stake in DAL at some stage, to provide a one-time resolution of balance sheet debtors. This could be done through converting outstanding debtors on balance sheet to an equivalent stake at an appropriate cap rate,” said JP Morgan in a recent report.
Third option being discussed by DLF management is to merge DAL with itself. This may probably require DLF to raise debt to buy DE Shaw’s investment in DAL, following which DAL will be merged with DLF. The merger may entail DLF issuing convertible bonds to Symphony Capital. DLF can’t issue fresh shares to Symphony, a foreign investor, as the realty company is also executing many non-FDI compliant projects.

Source: http://economictimes.indiatimes.com/News-/DLF-DAL-raise-Rs-1100-cr-debt-from-HDFC-Bank/articleshow/4382390.cms

STREET VIEW: DLF is looking to take a stake in DAL

We present to you the views of different analysts across brokerage houses.

CSFB
The story so far …
DLF Assets Ltd (DAL), a promoter company, entered into an agreement to buy 13 mn sq ft of commercial assets from DLF at a 9% cap rate. Against this, DLF recognised revenues of Rs101.7 bn between FY07 and FY09E at an average rental of Rs58/sf/m and PBT of Rs68.2 bn (~Rs40/share). Of the 13 mn sq ft, 9 mn sq ft is to be completed and ~6 mn sq ft leased by March 2009. The purchase was financed by about Rs1 bn in promoter equity, Rs43.5 bn in private equity (PE) from D.E. Shaw (US$400 mn) and Symphony (US$675 mn). The total outstanding from DAL to DLF is expected to be about Rs57.2 bn (US$1.1 bn) as of March 2009.
Valuation loss due to adverse cap rate movement
Cap rates and valuations have moved adversely since DAL contracted to buy at a 9% cap rate from DLF. Yields for listed Indian commercial assets currently range from 13% to 20%. We believe the fair valuation for DAL today could be somewhere between 11% and 13% cap rate resulting in a Rs19-32 bn erosion in DAL’s asset value.
Loss on private equity transaction
Media reports suggest D.E. Shaw wants to exit from DAL and that it has been promised a USD-protected return. We estimate the potential loss on an assumed 12.5% return to be about US$172 mn on the D.E. Shaw investment. While we do not know Symphony’s terms, we estimate a further potential loss of about US$209 mn if it were on similar terms as D.E. Shaw’s.

Reliance Equities
Merger likely to result in a dilution of 10–15% in DLF. The DLF-DAL merger is likely to result in dilution of 10–15% in DLF (assuming DAL’s are valued at the sale price). DLF had sales of Rs 106.2 billion in FY08–9M FY09 (out of a total transaction value of Rs 150 billion) to DAL. DAL paid Rs 51.6 billion (entirely through private equity funding), while the rest Rs 54.6 billion is yet to be paid (receivables). The merger would bring DAL assets on DLF’s books, while DLF shares would be issued after netting the receivables.

Morgan Stanley
What may happen – OPTION 1: DLF could take a partial equity stake in DAL in lieu of receivables. OPTION 2: DLF could buy the entire equity of DAL and merge the company. In option 2, the valuation at which DLF would acquire DAL and who would pay for the difference will be the key. It appears that DLF could buy back the assets at a meaningfully higher cap rate (12% or so), implying 30% or so lower value.
What would this mean for DLF – In option 1, not much would change for DLF except that receivables would get promoted to investments. In option 2, P/L impact – DLF would get rental flow of Rs 6 bln pa (available to securitise), B/S impact – assumes $1.05 bln debt (DE Shaw/Symphony) and assets sold to DAL. Valuation difference would either result in book writedown (DLF bears the cost) or new receivable/cash (promoters bear the cost).
Our thoughts - We think that DLF should transition its business model to ‘third party’ sales and mark down its historical DAL sales to market value. Intrinsic value of 9.5 msf of now completed DAL assets is roughly Rs60 bln at 11% yield vs Rs110 bln booked by DLF. Stay U/W

DLF eyes minority stake in DAL to aid REIT listing

DLF is considering picking up minority stake in DLF Assets Limited (DAL), reports CNBC-TV18 quoting sources. This will help DLF Assets in their plans for real estate investment trust (REIT) listing plan and DLF will be its sponsor for the same. This move may also be aimed at reducing DAL’s Rs 5,000 crore receivables to DLF.
CNBC-TV18 also learns that DAL has been trying to raise USD 450 million from private equity investors since July. The deal, supposed to close by the end of this financial year, is likely to be delayed till April.

Some good news though for DLF Assets Limited as well as the shareholders of DLF is that other than 9.5 million squre feet that will be delivered to DAL by the end of this year, they are securitizing rent and hopefully raising about Rs 2,000 crore from three banks. So that should also help bring down receivables.