One-Third of Developer Loans Are Sub-Investment Grade
Only 33 of the top 109 real estate developers received investment-grade loans (BBB and above) with aggregate sanctions of Rs 2.3 lakh crore, according to an analysis by Kotak Institutional Equities. As many as one-third of developer loans are categorised as sub-investment grade. Substantial delays a
Published -
Sep 8, 2020 4:58 AM
Only 33 of the top 109 real estate developers received investment-grade loans (BBB and above) with aggregate sanctions of Rs 2.3 lakh crore, according to an analysis by Kotak Institutional Equities. As many as one-third of developer loans are categorised as sub-investment grade. Substantial delays and stranded projects have led to a deterioration in the financial health of developers, as per the analysis. Around 25 percent of loan sanctions to builders were below investment grade. 32 out of the 109 developers having loan sanction of Rs 817 billion (16 percent) had their credit ratings suspended. Going forward, there is a likelihood of an increase in defaults, as well as credit downgrades for the weaker developers that may not be able to sustain the absence of incremental sales due to the current lockdown and ensuing economic weakness, it said. Investment grade refers to the quality of a company's credit. To be considered an investment-grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative. Higher grades are intended to represent a lower probability of default. The analysis noted that absence of price increase, an increased perception of execution risk, and the tax differential under GST shifted the purchasing pattern of buyers towards the completion of the residential project instead of making the purchase decision at the launch of the project. The shift in consumer pattern has required developers to fund a substantial proportion of construction cost that was previously funded by customer advances—thereby near-doubling the capital intensity of the development business. Going forward, too much pricing leeway from developers is not expected to stimulate demand or improve margins. Distressed developers may not attract any customer interest irrespective of price cuts for under-construction projects and strong developers may not venture into the same due to lower margins. In the absence of incremental funding, no new buyer will be willing to look at the project putting to risk extant capital deployed.
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