Real estate firms are trying their best to trim debt and reduce the cost of loans this year, even as some developers stare at defaults and insolvency risks.

Four years into the property market slowdown, tepid sales and piling unsold inventory are still worrying firms, pushing them to clean up balance sheets in order to sustain themselves until the market recovers.

On 25 August, India’s largest developer DLF Ltd said its promoters will sell their stake in its rental arm for Rs11,900 crore, which includes selling 33.34% to an affiliate of GIC Real Estate, Singapore, for Rs8,900 crore and buybacks of preference shares for another Rs3,000 crore.

The transaction, along with an institutional placement of shares, will see Rs1,300 crore of capital infusion into DLF that will enable it to reduce its Rs26,000 crore debt significantly.

“The deal arrangement should help address DLF’s stretched balance sheet, though it comes at the expense of significant equity dilution..," said a 28 August report by Edelweiss Securities Ltd.

“...Its residential operations remain challenging with sluggish new sales, little new launches and persistent slowdown in its mainstay Gurgaon market," it said.

Mumbai-based Lodha Group, which clocked the highest sales in 2016-17, plans to reduce both cost and quantum of debt in 2017-18. Its debt is around Rs14,500 crore, up from around Rs13,000 crore in October 2016.

“We expect our debt to reduce by Rs800-1000 crore this financial year and continue to see reduction in cost of funds. We don’t intend to raise any additional debt, though we may replace debt from time to time as we are offered better terms by lenders," a spokesperson said.

On Tuesday, Fitch Ratings said it has maintained the Rating Watch Negative (RWN) placed on Lodha Developers’ ‘B’ Long-Term Issuer Default Rating and the ‘B’ long-term rating on its outstanding $200 million 12% unsecured unsubordinated notes due in 2020. The RWN reflects the possibility that Lodha may not be able to complete the refinancing of the £225 million loan for its prime residential Mayfair development in London by end-September 2017, it said.

A Lodha spokesperson said, “We have already completed the refinancing and construction finance arrangements and hence, the probability of not refinancing is non-existent. We expect the rating watch to revert to neutral in the next four weeks once the new facility is drawn down."

Larger developers DLF and Lodha have better access to institutional capital compared to mid-sized ones, who are over-leveraged and are struggling with both sales and debt reduction, said analysts.

“Post-RERA, debt is bound to shoot up in the next couple of years because developers will need to raise money for project execution in order to prevent penalties and because sales continue to be slow," said Rajeev Bairathi, executive director and head of capital markets, Knight Frank India.

“It’s a question of survival for developers today. Some are downsizing their portfolios and partnering with pedigreed developers, while many are selling a portion of their land banks. But debt reduction is an interim solution and sales need to revive for the sector to turn around," he said.

Parsvnath Developers Ltd (PDL), with a net debt of Rs1,300 crore as of December 2016, is focusing on reducing its cost of debt. On 8 August, Crisil Ratings downgraded Parsvnath’s long-term bank facilities of Rs250 crore from C to D or default, reflecting delays in servicing the rated debt on account of stretched liquidity, a rating note said. “PDL has delayed in servicing its debt obligations following lower-than-expected cash flows from its projects. Ability to successfully monetize surplus land parcels will remain a key rating sensitivity factor," it said.

“We will be replacing high-cost debt with low-cost and may raise fresh debt this year. Servicing debt is not that tough but access to new debt has become a challenge," said Pradeep Jain, chairman, Parsvnath Developers.

Developers, particularly in the National Capital region (NCR)— worst hit by the slowdown—have been struggling to reduce debt.

Unitech Ltd, which had Rs5,818 crore of debt as of September, 2016, has been trying to monetize land and get projects started.

Crisis-hit realty firm Amrapali group is making efforts to monetize its land bank and rope in co-developers to complete over 30,000 housing units in Noida and Greater Noida, said managing director Anil Sharma, according to a 15 August PTI report.

Under a 9 August order passed by the Allahabad bench of the National Company Law Tribunal (NCLT), liquidation proceedings against Jaypee Infratech Ltd were initiated under the Insolvency and Bankruptcy Code of India, 2016. Jaypee Infratech has defaulted on a Rs526.11 crore loan outstanding to IDBI Bank, Mint reported on 23 August.

“Banks are concerned about disbursals and investors are worried about insolvency risks in north, compared to south where developers have better balance sheets," said Anuranjan Mohnot, managing director at investment firm Amplus Capital Advisors Pvt. Ltd.

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