Lodha Developers sold a maiden $200 million five-year bond callable in year three early Friday morning, obtaining a relatively small order book of $400 million.
The Ba3/B+ rated Reg S-only offering didn't manage to garner enough interest to tighten pricing. The bond priced at its initial guidance yield of 12%, the highest ever for an Indian high-yield corporate, according to Bloomberg bond data. That is at fair value, a credit analyst said.
The developer struggled due to falling Indian property prices and the structure of the deal.
"Investors are staying away from the property sector," said a source close to the transaction.
For a transaction of this size, the bookbuilding process also took longer than expected, with Asian roadshows ending Wednesday and the bond pricing in the early hours of the Asian time zone on Friday morning.
This is the second time Lodha Developers is attempting to tap international bond markets after failing in December, citing adverse market conditions. Reports at the time had put the initial price guidance at mid to high 10% and a target size of $350 million.
The proceeds from Lodha Developers’s bond — less the $7 million that will be used to repay the parent guarantor Lodha Developers Private and Lodha Crown Buildmart Private — will be invested into its international subsidiary Lodha Developers International Holdings, announced in a prospectus prior to the pricing of the bond.
Approximately $242 million will be returned to the parent guarantor to refinance existing debt and the balance will be retained in Lodha Developers International Holdings for general corporate purposes outside India, according to a source familiar with the matter.
Risks
Housing sales fell to 1.75 million units in the primary markets of seven major cities in 2014 as compared to nearly 2 million units in the previous year, according to property consultant JLL India in a report released early-January. These seven cities are Delhi-NCR, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Pune.
Developers would be sitting on unsold inventories of 27 months at the end of this year as compared to 28 months in 2014-end, added the consulting firm.
US dollar bondholders are also exposed to a very high level of subordination. The proceeds of the bonds is issued by an offshore special purpose vehicle, then invested in compulsory convertible debentures of an associated company. The proceeds will ultimately be issued to repay offshore debt.
Clearly, the market still hasn't recovered from the problems faced by Greenko Group when the Reserve Bank of India announced a ruling that effectively outlawed a new structure pioneered by the Indian issuer, which promised to open up the offshore bond market to a far wider number of Indian issuers.
Moreover, Lodha is privately owned, with the board of directors comprising a family member and the chief financial officer, leading to corporate governance issues, credit analysts warned.
"[The volume of the bond] is seemingly less than they may have desired," said Charles Macgregor, head of Asia for credit research firm Lucror Analytics in a note on Friday. "We do not view this credit favourably given the legal risk and lack of a sound corporate governance framework."
Market reforms
Despite the risks, India's property market looks promising this year. The government has taken quite a few initiatives to promote homebuyers to invest in properties this year.
The budget released on February 28, for example, made a declaration of increasing the home loan exemption limit from 1.5 million to 2.5 million, the Reserve Bank of India slashed down its key interest rates by 25bp to 7.5% on Wednesday making the home loans cheaper and talks of facilitating affordable housing.
"We view favourably the outlook for growth in residential demand, particularly around Mumbai," said a Hong Kong-based credit analyst who declined to be named. "Lodha is well positioned to take advantage of this prospective growth."
Lodha Developers is the largest India-based residential developer by sales with a penchant for high-end projects in Mumbai. In financial years 2013 and 2014, its aggregate contracted sales by value were higher than those of India's second- and third-largest property developers combined.
The company has also expanded beyond its shores and is currently building the world's tallest residential skyscraper in London called the World One Tower. Once completed, the project — which costs £205 million ($312.6 million) — will deliver over 300 homes.
The foreign-denominated income generated from sales in the UK will help mitigate the foreign exchange risk that has become prevalent from its US dollar bond. This is good for the company given that a bulk of its revenues is denominated in Indian rupees.
Lodha Developers's land bank of 25 million square metres is also among the largest in India and has been externally valued at more than $10 billion. The company expects its current land bank to support developments and sales for the next seven years.
Highest cost ever
The closest comparables for Lodha Developers's bond, which is unconditionally and irrevocably guaranteed by Lodha Group and its key subsidiaries, includes BB- rated IT company Rolta India’s existing notes expiring in 2019, which traded at a yield-to-worst of 9.152%, according to a source familiar with the matter.
A YTW rate is the lowest yield an investor can expect when investing in a callable bond.
Other comparables include B rated Indian clean energy company Greenko Group and B1/B+/B+ rated developer Indiabulls Real Estate’s outstanding 2019 bonds, which traded at a YTW of 9.411% and 11.802%, respectively.
Indian dollar-, euro- and yen-denominated corporate bond volumes already total $2 billion for the year-to-date period, compared with the $343 million achieved in the same period of last year, Dealogic data shows.
Barclays, CLSA and JP Morgan were the lead bookrunners on the transaction.
