Lessons for India from China's Evergrande woes
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Nov 17, 2021 | Page No.: 5 | Position: Top Left | Source: Nandini Vijayraghavan | Sq Cm: 810 | AVE: 344064 | PR Value: 1720320
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Lessons for India from China s Kvergrande woes It is crucial for India s realty sector to adopt transparent rating and disclosure norms SEBI NFRA should get into the act NANDINI VIJAYRAGHAVAN Ticking time bomb explains the contradictory phenom- age and coverage and 20 per cent to Properties the number of notches ust as we are spasmodically re- The Evergrande crisis was a disaster ena of Godrej Properties and financial policy upgrade assigned to reflect the sup- covering from the Covid-i9 pan- waiting to happen Founded in 1996 Mahindra Lifespace reporting losses For factors that may be quantified port of their controlling shareholder demic the potential collapse of at Guangzhou China Evergrande ex- amidst rising sales like scale and leverage and coverage s and the final credit ratings the world s most indebted panded swiftly financing its growth Oberoi Realty for instance did not ranges are provided for each rating It is in India s self-interest to adopt operty developer - China Ever- with debt and pre-sales which is report pre-sales Other developers re- category Table 4 Domestic CRA a timely accurate and transparent grandee Group - threatens the global cash collected in instalments by ported metrics such as new sales methodologies outline key rating disclosure regime and robust credit macroeconomy Between September property developers before the com- booking new sales sales and pre- factors that are similar to those of in- rating frameworks The benefits are and November 2021 Evergrande - pletion of construction and han- sales which may or may not be syn- ternational CRAs but weights and numerous including improved fran- China s second largest property de- dover of units to buyers onymous The consistency fre- ranges for quantitative factors are chise identification of key risks and veloper - narrowly averted three de- Evergrande engaged in unrelated quency and quality of disclosures of not reported hedging mechanisms realistic valu- faults on its USS-denominated bond diversification The company sold listed Indian corporates lag those SEBI should also require domestic ations of assets and financial instru- coupon payments by remitting an bottled water owned China s best The Evergrande crisis has the potential to become a global contagion REUTERS domiciled in countries at a compar- CRAs to emulate international CRAs ments and higher FDI inflow aggregate US 277 million on the eve professional soccer team briefly en- able stage of development - Indone- by reporting standalone and final of the expiry of the 30-day grace gaged in pig farming manufactures Evergrande s situation was by no Opaque credit ratings sia and The Philippines credit ratings For instance do- The writer a CFA is the period electric vehicles and also sold wealth means unique China s property sec- The investment grade domestic SEBI the National Financial Re- mestic CRAs must report standalone Singapore-based head of research at This is despite Evergrande report- management products to investors tor propelled by low-cost debt grew credit ratings assigned to IBREL and porting Authority and the Institute credit ratings for companies like Korea Development Bank Views ing around 1 34 billion profits after employees and home buyers exponentially which in turn turbo- Sobha belie the concerns raised by a of Chartered Accountants of India Mahindra Lifespace and Godrej expressed are personal tax in the first half of 2021 and 11 15 By June 30 2021 Evergrande s liab- charged the country s GDP growth rudimentary exercise like the three should jointly lay down guidelines billion cash as recently as June 30 ilities stood at a mind-boggling 252 The slowdown in the property sector red lines Table 3 IBREL and Sobha that will improve the quality of dis- Domestic credit rating s of India s 2021 billion equivalent to 1 5 per cent of which accounted for 30 per cent of are rated AA- with developing im- closures China s GDP GDP coincided with the onset of plications and A with stable out- Regulators must specify a set of ten largest listed property developers Table 3 Covid-19 look respectively operating and financial metrics that Domestic Credit Rating Three red lines and permissible annual growth in debt Table 1 The strengths of the two highest listed companies must report annu- Metric Threshold Colour Number of red Allowable annual Three red lines rated AA developers Mahindra ally for the current year and the pre- Sunteck Realty CARE AA- Negative ICRA India Ratings AA- Stable China s central bank the People s Lifespace and Godrej Properties - vious four years Listed entities must DLF CRISIL AA- Stable ICRA Positive code lines breached growth in debt Bank of China and the state con- low indebtedness and backing of also mandatorily report their stan- Godrej Properties ICRA AA Positive Liabilities Assets Maximum 70 Green 0 15 minus advance struction regulator Ministry of strong conglomerates - are moder- dalone and consolidated profit and Mahindra Lifespace Developers CRISIL India Ratings AA Stable Yellow 1 10 proceeds from projects Housing and Urban-Rural Develop- ated by their losses Mahindra loss account balance sheet cash sold on contract ment decided to rein in property de- Lifespace reported losses in FY2020 flow statements and supporting Phoenix Mills CRISIL A Negative India Ratings A Stable Net debt Equity Maximum 100 Orange 2 5 velopers debt by introducing the and FY2021 while Godrej Properties notes to accounts at least Prestige Estates Projects ICRA A Stable Cash Short-term Minimum 1 0x red 3 0 three red lines which are indicators reported losses in FY2021 semi-annually Brigade Enterprises CRISIL ICRA A Stable borrowings of property developers indebted- The conflicting results of the Oberoi Realty CARE AA Negative Source China s Three Red Lines UBS Jan 2021 ness and liquidity three red lines exercise and invest- Adopting global best practices Funding which was critical to the ment grade ratings are not alarming Assigning credit ratings is a quantit- Indiabulls Real Estate Brickwork AA- Developing Implications India s ten largest listed property developers Table 2 developers who failed to comply because ratings are opinions of bor- ative and qualitative exercise that in- with one or more of the three red rowers ability to repay debt corporates multiple factors such as Sobha CRISIL ICRA A Stable Metric Liabilities Net debt Cash assets - adv sales Equity Short-term debt lines was restricted Table 1 This ex- promptly But the quality of Indian an entity s current and projected op- criiirra• NM Wahcitac pectedly resulted in multiple prop- listed entities disclosures and erating and financial performance Threshold Maximum 70 Maximum 1 00 Minimum 100 erty developers including Ever- opaque domestic credit rating meth- management quality and operating International credit rating methodologies are specific table 4 Entity Period FY2020 FY2021 FY2020 FY2021 FY2020 FY2021 grande Fantasia Sinic and Kaisa odologies are concerns environment Credit rating agencies Rating Scale US Billion Leverage Coverage struggling to service their debt CRAs assign ratings based on pub- Factor Sunteck Realty 48 20 42 3 0 18 0 19 93 8 127 5 Revenue EBITDA EBITDA Debt FFO Debt DLF 41 60 37 6 0 16 0 14 67 2 62 5 punctually Need to improve disclosures lic and material non-public informa- Interest EBITDA Real estate is an industry character- tion Expense Godrej Properties 126 50 83 3 0 24 0 02 69 2 124 8 Applying 3 red lines to India ised by a wide schism between an en- Credit rating methodologies must The real estate industry is cyclical tity s cash flows and accounting be transparent for investors and reg- Weight 15 10 10 10 10 Mahindra Lifespace 42 70 47 9 0 06 0 07 76 4 79 8 and reliant on debt Hence testing profits ulators to concur or disagree with AAA 40 0 4 0 20 0x 100 Developers the 10 largest listed Indian realty Accounting policies in most juris- ratings AA 12 0 - 15 0 2 0 - 4 0 15 0x - 20 0x 0 25x - 0 75x 80 0 - 100 0 Phoenix Mills _ 46 7 0 67 0 55 118 6 62 2 companies - all constituents of the dictions require property de- SEBI should require CRAs to adopt S P BSE Realty Index - for compli- velopers to report income and ex- global best practices The rating A 12 0 - 15 0 1 5 - 2 0 10 0x - 15 0x 0 75x - 1 5x 55 0 - 90 0 Prestige Estates 95 90 92 3 1 67 0 35 28 4 128 2 BBB 7 0 - 12 0 0 75 - 1 5 5 0x -10 0x 1 5x - 2 75x 35 0 - 55 0 ance with the three red lines is illu- penditures according to the methodologies of the three largest Projects Brigade Enterprises 99 30 102 7 1 5 1 38 714 7 818 minating Table 2 Only one de- percentage completion method global CRAs - Fitch Moody s and S P BB 3 5 - 7 0 0 25 - 0 75 2 25x - 5 0x 2 75x - 4 5x 20 0 - 35 0 veloper-Sunteck Realty-complied which means incomes and expendit- - delineate the key rating factors Oberoi Realty - 0 15 0 14 16 6 20 7 with all three red lines in FY2021 ures are recognised as a percentage and the weights assigned to each of B 1 0 - 3 5 0 125 - 0 25 1 0x - 2 25x 4 5x - 6 5x 10 0 - 20 0 Seven developers have complied of the projects completed during a them Indiabulls Real Estate _ 77 8 0 99 1 21 21 8 23 4 with one or two red lines Two de- reporting period For instance Moody s Construc- CCC 0 25 - 1 0 0 06 - 0 125 0 5x -1 0x 6 6x - 9 0x 5 0 - 10 0 velopers - Indiabulls Real Estate Hence it is possible for property tion Rating Methodology assigns 25 CC 9 0x 5 0 Sobha 99 4 100 6 1 26 1 19 2 3 6 1 IBREL and Sobha - failed to comply developers to report profits when per cent weight each to scale and Source Bloomberg and author calculations with all three redlines pre-sales decline and vice-versa This business profile 30 per cent to lever- Source Moodys s Construction Rating Methodology September 10 2021