Borrowing Costs Drop For Piramal Group As Fear Factor Eases

Recent moves by Piramal Enterprises Ltd. to raise equity and transfer riskier developer loans off the books of their non-bank finance company are paying dividends. After suffering high borrowing costs in the second half of last year, Piramal group firms have started to see relief.Data from Bloomberg showed that the credit spread on bonds issued by Pirmal Group firms has reduced. The credit spread is the additional interest that investors demand over government bonds, seen as risk-free. The higher the spread, the poorer the risk perception.“The incremental borrowing costs for the company have started to decline following the recent fund-raise of Rs 14,500 crore. Recently, the company was able to raise Rs 1,900 crore of long-term debt at or below 9 percent coupon,” said Piramal Enterprises in response to an email sent by BloombergQuint..Interest Rate ReliefIn June 2019, Piramal Enterprises raised Rs 200 crore by issuing two-year bonds at 9.25 percent. The credit spread on this bond issue stood at 353.2 basis points over the prevailing two-year government bond yield.The spreads rose further in late December and early January when Piramal Enterprises borrowed funds by paying more than 450 basis points over the relevant government securities.However, late January brought relief for the company when spreads eased to just over 280 basis points.The drop in credit spreads for Piramal Enterprises has been steeper than the fall in the broader index of similarly-rated securities as compiled by the Fixed Income Money Market and Derivatives Association or FIMMDA. This suggests that it is not just easy liquidity that is helping the company, but also its reorganisation efforts.Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Ltd., said the drop in credit spreads was a sign that the “fear premium”, which was in excess last year, was now unwinding.“If you look at the host of measures taken by various non-banks, including Piramal, in terms of reorganising the asset-liability mix, disinvestment, etc., the spread compression has less to do with the yields on government bonds and more to do with their reorganisation efforts ,” she said.Piramal has reduced its leverage, diversified its liabilities and borrowed for longer tenors, providing better comfort to investors, said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.“Corporate governance is very important to investors today. So, early movers in terms of reducing leverage, improving governance, bringing credible equity investors and having diversified business, are the ones who gets the advantage of better pricing in the bond markets,” Manglunia told BloombergQuint.Manglunia said the skepticism towards the real-estate sector and NBFCs with large developer loan portfolios seems to be easing as well. He expects funding conditions to improve for these firms.For the two other large NBFCs with real estate exposure, the change in market perception is tougher to judge. Indiabulls Housing Finance Ltd. has not tapped the bond market in recent months. Edelweiss group companies have issued zero coupon bonds, which typically get sold at a discount. Since these are private placements, the discount and, hence, the effective interest earned is not available in public domain.Emails sent to Indiabulls Housing Finance and Edelweiss on Friday were not answered..What Worked For PiramalOver the past year, the Piramal Group has deleveraged by raising fresh equity and selling its stake in other companies.Last month, Piramal Enterprises raised Rs 14,500 crore in equity capital to strengthen the balance sheet. Around Rs 3,650 crore came from a rights issue and Rs 9,100 crore from the sale of its stake in Decision Resources Group and in Shriram Transport Finance. Further, Canadian investment group Caisse de dépôt et placement du Québec infused Rs 1,750 crore into the company through a preferential allotment of compulsorily convertible debentures.The company said it planned to tap multiple avenues to raise funds and shift towards long-term funding sources..The company plans to tap multiple avenues to raise funds, including both domestic market via non convertible debentures, as well as foreign markets for medium-term note and external commercial borrowings.Piramal Enterprises statement to BloombergQuint.At Piramal Capital and Housing Finance, the NBFC arm of the Piramal Group, there were concerns over the heavy concentration of developer loans. To balance this out, the NBFC is now pushing retail housing loans more aggressively.According to the group’s investor presentation, as of December 2019, the company’s developer loan portfolio stood at Rs 36,084 crore compared with Rs 40,080 crore in the previous year. The retail mortgages portfolio has grown by 57 percent to Rs 6,130 crore as of December 2019 from Rs 3,920 crore in December 2018.In total, the Piramal Capital reduced its debt by Rs 15,000 crore since the start of this fiscal and as a result, its leverage ratio came down to 2.8 times in December 2019 from 4.6 times in December 2018..Piramal Enterprises’ debt-to-equity is expected to be 1.2x on a consolidated basis at the end of March 31, 2020, post considering the proceeds from the rights issue and from the sale of DRG.Piramal Enterprises Statement To BloombergQuint

Borrowing Costs Drop For Piramal Group As Fear Factor Eases

After suffering high borrowing costs in the second half of last year, Piramal group firms have started to see relief.

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