Mumbai: Mumbai-based Godrej Properties Ltd (GPL) will raise Rs.200 crore by issuing commercial paper that will allow it to raise money from a broad set of investors at attractive rates, largely for working capital requirements.
Similar to short-term bank borrowing, commercial paper allows a borrower to tap banks, mutual funds and financial institutions as well.
“This would help us further reduce the cost of short-term borrowings. It’s not restricted to any specific project,” said V. Srinivasan, executive director, GPL. “Commercial paper will be placed from time to time as per the company’s working capital financing needs.”
The Rs.200 crore commercial paper programme is part of the overall working capital limits rated by credit rating agency Icra Ltd in September and has been given the highest rating of A1+, said Srinivasan.
“GPL had rating for short-term loans for its working capital. Now additionally, we can issue commercial paper for our working capital requirements,” Srinivasan added. “CP provides for better rates with a wider set of investors and better liquidity.”
GPL has used a varied mix of fund-raising mechanisms.
In July, it set up a Rs.770 crore investment and development platform for residential projects along with a consortium of global investors led by Dutch pension services provider APG.
GPL has also raised private equity (PE) capital for several projects, the latest being in April—Rs.100 crore from ASK Property Investment Advisors Pvt. Ltd in its first redevelopment project in Mumbai.
In March, the developer raised Rs.407 crore by selling shares through an institutional placement programme (IPP), while other companies have received lukewarm responses to similar exercises.
This is the first time GPL has opted for a commercial paper rating. Developers tap financial institutions such as banks for construction finance, but due to restricted lending from them they approach non-banking financial companies and PE funds to borrow capital at high costs.
Icra’s September rating note says that the A1+ rating factors in the growth in GPL’s operating income; high pre-sales in under-construction residential projects in Ahmedabad, Gurgaon and Kolkata; the sale of commercial space to group companies, ensuring steady cash flows during financial years 2013 and 2014; and improvement in the company’s gearing levels following the equity raised through the IPP.
The rating also gets support from Godrej Properties’ strong parentage in the form of Godrej Industries Ltd and its low commitment in terms of land payments due to its business model of entering into joint development agreements with the land owners.
But it is constrained by slowdowns in new project launches in Bangalore, Hyderabad and Kochi due to delays in obtaining approvals, decline in profitability on account of cost escalations and sale of commercial projects below break even, increased dependence on external debt due to commitments towards commercial projects, and GPL’s high working capital requirements.
Sales of office space is critical for near-term cash flows as GPL plans to scale up its residential operations in the second half of this fiscal year, launching around 15 projects with a total developable area of 7-8 million sq ft., Icra said.
“However, Icra draws comfort from the fact that the company would sell the entire area in the commercial development at Vilkhroli to group companies which would ensure steady cash flows and support margins” in fiscal years 2013 and 2014, it added.
GPL’s net debt rose to about Rs.1,740 crore in the June quarter from Rs.1,560 crore in the preceding quarter, according to a 30 July report by Motilal Oswal Securities Ltd.
According to some analysts, commercial paper, despite its advantages, is not commonly used by real estate developers.
Icra analyst Rohit Inamdar said that while banks give both long-term and short-term loans, a commercial paper programme requires a high rating for the borrower, making only a few top developers with strong liquidity support eligible for the tool.