Mumbai: The inherent risks in India’s real estate focussed shadow banks were laid bare with the default of Altico Capital earlier this month. The fact that Altico, with its institutional ownership led by marquee investors with cumulative experience of many decades failed to pay a relatively small amount of ₹19 crore in interest repayment has raised eyebrows.
However, according to insider accounts, Altico’s three shareholders, private equity firms Varde Partners, Clearwater Partners and Abu Dhabi Investment Council, had been in negotiations with its lenders for a debt restructuring for over a year even as they spoke to potential buyers to either offload their stakes or sell a large portion of the portfolio. Evidently, the attempts did not bear fruit and sensing the impending crash two of its lenders, both private sector domestic banks, opted to parachute out in time.
With this, for the industry at large the moment of truth was finally there. To begin with, Altico’s collapse has completely debunked a long held notion that PE-owned companies were somehow more stable than their family-owned peers. Instead it has only proven beyond doubt, yet again, that merely chasing valuations in a short span could only mean doom and distress in the long run. In its current avatar Altico which has descended from Clearwater partners, one of India’s foremost special situations investors, began lending to real estate developers at an early stage of project cycle. Typically builders would borrow from real estate lenders like Altico at rates hovering around mid-teens and replace it with cheaper financing later when the projects began generating cash. It worked well for both. But, over the years as liquidity became tighter and bank financing almost disappeared borrowers began flocking to non-banking companies (NBFCs) and housing finance companies (HFCs) to raise debt against finished projects as collateral.
This arrangement looked great on paper but given the transient nature of real estate micro markets in India, a large chunk of the collateral did not provide enough cover against the money raised. And a large portion of the inventory remains unsold to date with no clear visibility on future sales or any other liquidity event. To make matters worse many such NBFCs and HFCs began competing among themselves to lend more ( understandably to grow their books which brought in the valuations) , even as underlying collaterals shrunk with each refinancing round. Adding to the crisis was widespread malpractices by developers who in many instances sold collateralized inventory without the consent or knowledge of the lender (s).
In hindsight it appears that the shareholders of Altico had anticipated this situation well in advance and had been looking for a timely exit, while several potential buyers showed interest but backed off after due diligence. And as things stand now , many lenders such as banks, mutual funds are staring at significant haircuts in Altico, and in more such cases, potentially.
The Altico affair though unfinished yet could just well be the tip of the iceberg with a distinct possibility of more real estate focussed lenders facing similar situation.
