Debt recast at real estate project level to revive sector: Experts

The RBI has sought to strengthen the ICA (inter-creditors agreement) mechanism
The Kamath panel's move to make debt restructuring mandatory at the project level instead of loan recast of the parent company will help revive the projects This, in turn, will help developers revive stalled projects faster, say real estate builders and experts.

“The panel has separated the debt of the asset from the main company in order to assess project viability. My fear is that most real estate projects have more loan to value (of the asset) that they can sustain, so someone will have to take a haircut,” said Vikas Oberoi, Chairman of Oberoi Realty.

Real estate companies usually form separate special purpose vehicles (SPVs) for each project as subsidiaries of the parent. Some of the projects may get a good response due to location and other factors. 

As per the scheme, the Reserve Bank's special resolution window would enable lenders to provide one-time restructuring of loans based on the prescribed framework pertaining to Covid-19 impacted assets. “This is expected to benefit real estate developers and suppliers of key raw materials, (allowing them) to reset their debt and provide a fresh lease of life to service their loans prudently. Also, this will enable corporates to focus on restarting their business in the next normal with renewed vigour and vitality. Lower interest rates combined with this accommodative stance of the Central Bank will aid in rebuilding consumer sentiment, thus consumption (including housing sales),” said Ramesh Nair, CEO and Country Head (India) JLL.

The RBI has sought to strengthen the ICA (inter-creditors agreement) mechanism by clarifying that ICA is mandatory and compliance of the signing of ICA shall be assessed as part of its supervisory review. “This should encourage signing of the ICA and preparation of resolution plans. The requirement for maintenance of escrow accounts will also aid monitoring and control,” said L Viswanathan, Partner, Cyril Amarchand Mangaldas.  

With this, the sales of a particular project will be retained in an escrow account and will be used to repay loans. The Indian real estate sector is going through a crisis as its sales fell 81 per cent in top Indian cities in the June quarter and new launches fell to zero. In the office space segment, top metros have seen a huge decline in absorption. 

From nearly 32.3 million sq ft of space absorbed in the first half of 2019, the first half of 2020 absorption fell to 13.7  million sq ft. Similarly, the cumulative supply addition was 13.5 million sq ft in H1 2020, compared to 26.6  million sq ft in H1 2019, according to a Savills India report.

Nirmal Gangwal, founder and managing partner, Brescon Advisors, a boutique investment banking firm, which specialises in orporate debt resolution, said after a long time something concrete had come out with sufficient flexibility to lenders.

"This has also brought a strict sense of discipline on all lenders with respect to signing of ICA, which is must for successful resolution. Even the various ratios as worked out have taken into consideration real time needs of the industry and banking system, keeping in mind practical approach and required level of leverage to such ailing sector due to the impact of Covid -19. The earlier circular of August 6 2020, has given enough room to lenders to convert part of debt into equity or otherwise with flexibility of interest reduction besides normal deferment by way of interest and principal for 2 years," said Gangwal.

"I hope that rating agencies will also take some flexible and more progressive approach while rating the resolution plan. The current rating requirement is of RP4, which could be made a little liberal in the initial years till the economy actually revives and green shoots are visible. My credo to RBI and the wisdom of the Kamath committee." Gangwal said. 



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