DLF’s debt set to increase by Rs2,200 cr after absorbing DAL

DLF’s debt set to increase by Rs2,200 cr after absorbing DAL

New Delhi: Real estate firm DLF Ltd’s proposed absorption of DLF Assets Pvt. Ltd (DAL) will increase debt at India’s largest developer by market value by Rs2,200 crore while giving it an additional Rs500 crore of rental income ever year, according to a senior company official.

DAL, currently owned by the founders of DLF, buys and holds the completed commercial assets of the company. The merger process involves DLF subsidiary DLF Cyber City Developers Ltd, being united with Caraf Builders and Constructions Pvt. Ltd, the holding company of DAL. The deal is expected to be finalized in two-three weeks.

DAL’s debt is at Rs1,500 crore while that of Caraf is Rs700 crore. As on 30 September, DLF had debt of Rs14,000 crore, which will rise to Rs16,200 crore after the process is complete.

“The quality of the debt is lease rental discounting debt," said Saurabh Chawla, executive vice-president for finance at DLF. “We have nine-year leases on the properties, so every month debt will get paid to the lenders."

Lease rental discounting involves individuals or companies borrowing funds from banks against the future expected rentals of a commercial property.

The merger of Caraf and DLF Cyber City will be a cashless transaction, Chawla reiterated. While DLF will have a 60% stake in the merged entity, Caraf’s shareholders (DLF’s promoters—K.P. Singh and his family) will hold a 40% stake in the merged entity.

While the company did not disclose the valuation of the deal, DLF said that DLF Cyber City will issue a security instrument, which could include an equity share or convertible preference shares to the promoters of DLF.

“Around 100% of Caraf will go to DLF Cyber City in lieu of the 40% stake," Chawla said. “The board of directors will meet and decide on the number of shares to be issued to promoters."

The integration is being done to consolidate DLF’s rental assets and to eliminate “perceived conflict of interest between promoter entities and DLF," an earlier company statement said.

DLF currently has a lease rental income from commercial properties of Rs700 crore every year and after the merger, the firm expects an additional Rs500 crore. But 70% of this rental will go to lenders under the lease rental discounting scheme.

“As of now, the deal does not seem negative," said an analyst with a domestic brokerage firm, who did not want to be identified. “But the implication of the deal will depend on the valuation. The good thing is that though the debt for DLF will increase, since all of it is linked to lease rental discounting, the debt will be taken care of."

DLF had initiated the process of absorbing DAL in March when the firm appointed a committee of independent directors to evaluate various options. The committee in turn appointed a set of advisors including Kotak Mahindra Capital Co. Ltd, Enam Securities Pvt. Ltd and Citigroup Global Markets India Pvt. Ltd to facilitate the evaluation. DLF’s board of directors accepted the recommendations of the committee on Tuesday.

DLF Cyber City has 6.7 million sq. ft of commercial space in Gurgaon and two operational malls in Delhi (Emporio and Promenade).

Caraf has four rent-yielding properties with a total leased area of 3.3 million sq. ft and a 96% stake in DAL, which owns four special economic zones with a total leased area of 6.4 million sq. ft.

In the past, DAL had bought assets from DLF, but since the quarter ended December 2008, the developer suspended sales to DAL due to a slowdown in commercial leasing. DLF had a contract with DAL to deliver 13.5 million sq. ft of space, of which 6.4 million sq. ft has been delivered and around 7 million sq. ft will be delivered over the next three years. DAL owes Rs2,700 crore to DLF which will be paid to DLF as and when the developer delivers properties to DAL.

In fiscal 2007, DAL contributed 61% of DLF’s profit before tax and till it suspended sales, DAL typically contributed around 40% of the developer’s profit before tax.

Over the last three years, DAL has received $1.15 billion (Rs5,370 crore) in total from Symphony Capital Partners ($450 million), DE Shaw and Co. Lp ($400 million) and Lehman Brothers ($200 million). In November 2008, Lehman sold its stake to Symphony taking the investment in DAL to $650 million.

DE Shaw has also sold a substantial part of its stake to Caraf for an unknown sum. The hedge fund now has a 3.5% stake in DAL.

In May, DLF’s promoters sold a 9.9% stake in DLF to institutional investors for Rs3,860 crore to raise funds to buy out DE Shaw’s stake in DAL. After the sale, the promoters’ stake in DLF has come down from 88.5% to 78.6%.

DAL will still go for an overseas listing of its real estate investment trust DLF Offices Trust, but the company did not give a time line for the listing. “The markets are much better now but we do not know when the listing will take place," Chawla said.

DLF’s stock on the Bombay Stock Exchange fell 0.42% while the benchmark index Sensex was up by 0.2%.