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The operating cash flows of real estate developers are expected to reduce by around 30-50 per cent in the current fiscal, resulting in higher reliance on refinancing and incremental debt to meet project costs and debt obligations, as per ICRA estimates.
While many companies have availed themselves of moratorium to bring down debt repayments, which, coupled with automatic reduction in collection-linked prepayments, has provided some support in terms of debt coverage levels, developers with a high proportion of slow-moving or stalled projects with significant impending debt repayments are likely to continue facing cash gap issues.
A one-time restructuring of debt obligations can provide considerable support for such stressed projects, as deferment of obligations/additional funding to meet the cash gap, with a favourable repayment structure spread over two years, would provide the required liquidity to enable project completion.
The RBI has recently released sector-specific leverage and debt-coverage guidelines for determining eligibility for restructuring of stressed loans, including those in the residential real estate sector. Real estate has been identified as one of the more deeply impacted sectors, and consequently, relatively high leverage levels have been permitted for the sector.
The required debt coverage levels are, however, similar to those expected across most identified sectors.
Covid double whammy
The Covid-19 has served a double whammy to the already reeling residential real estate sector in India with inflows from both new and already booked sales having been adversely impacted, stress levels on developers’ operating cash flows have increased significantly.
Mahi Agarwal, Assistant Vice-President and Associate Head at ICRA, said, “Developers were already suffering from reduced credit availability post the onset of NBFC liquidity crisis and with Covid-19, the overall liquidity available to the residential real estate sector has reduced further, amidst lenders’ concerns on deteriorating asset quality and increasing loan-to-value ratios. With new guidelines providing for financial headroom, stressed developers are now likely to receive much-needed liquidity support which will aid management of cash flows and allow for completion of slow-moving/stalled projects.”
The guidelines
As per the resolution plan guidelines, residential developers will need to maintain various parameters at a project-level in order to be eligible for loan-restructuring.
In terms of implementation of the restructuring scheme, lender assumptions on future cash flows, structuring of debt obligations, and accounting policies being followed would be the key look-out areas. Appropriate structuring of repayments, based on expected future cash flows, would be important, as the same would allow for the suggested debt coverage levels to be met and would ultimately enable project completion on the back of the external funds thus provided.
Overall, the provision of this one-time restructuring is expected to be beneficial for stressed developers, with the funding expected to aid project completion, ICRA stated.
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