Another default by the non-banking finance company (NBFC), Altico Capital on debt repayment has worsened the nation’s year long-credit crisis. Altico Capital was formed in January 2004 and is funded by global private equity players such as Clearwater Capital Partners (44.2% stake), Varde Partners (22.2%) and Abu Dhabi Investment Council (33.6%), which failed to pay the interest of Rs 19.97 crore on an External Commercial Borrowing (ECB) it had raised from Dubai-based Mashreq Bank PSC. The NBFC announced interest payment default on the gross principal amount of Rs. 340 crores. The ECB has a 6-year tenor with an interest rate of 11.65%.
Gradually over the years, as liquidity diminished in the market, the borrowers started borrowing from NBFCs and HFCs to raise debt by holding the finished project’s property as collateral. Typically, what the developers did was, they borrowed from firms like Altico Capital at rates that hover around mid-teens and then replace it with cheaper financing later when the projects started generating cash. The NBFC started providing loans to real estate developers at an early stage of their project phase. This was a win-win situation for both parties. Around 28% of such loans were attributable to early-stage funding of projects as of July 2019, and 70% of the loan book was under suspension.
Altico Capital focuses on senior secured loans to the mid-income residential and commercial real estate sector across Tier-1 cities in India including Mumbai, NCR, Chennai, Bengaluru, Pune and Hyderabad. In addition to the strategy for providing financing solutions to the real estate sector, it also provides structured finance solutions for infrastructure and other similar sectors are also offered.
It sunk to the loss of Rs 13 crore in the half-year ended March 2019 from a gain of Rs 100 crore a year earlier. This was primarily due to high financing costs and a decline in the sale of loans to Asset Reconstruction Companies (ARCs).
Altico Capital, with almost Rs. 4,000 crores on its loan book as of Sep 2019, is exposed to real estate developers. Many of these real estate developers have low and stressed credit profiles. Therefore, on 3rd September, India Ratings downgraded Altico Capital’s long-term issuer rating to’ IND A+’ from’ IND AA-‘ and short-term issuer rating to’ IND A1′ from’ IND A1+’ with a’ Negative’ outlook. CARE Ratings also downgraded the debt of the firm to B- from AA- as Altico faces a concentration risk inherent in retail borrowing due to exposure to large ticket sizes towards the real estate sector.
The long-standing notion related to (Private Equity) PE-owned firms being more stable than family-owned firms was debunked by the fall of Altico Capital. Instead, it showed that the simple pursuit of better valuations in the short-run could only mean distress when it comes to the long-term.
The deal looked good on paper, but because of the transient nature of Indian micro-real estate markets, a large portion of the property used as collateral was not sufficient to provide protection against the money raised. To make matters more serious, due to excessive competition the NBFCs and HFCs continued to borrow more through the underlying collateral value was shrinking. It was clubbed with malpractices on the part of the developers. They have sold collateral without the consent or knowledge of the lenders.
In retrospect, it seems that the Altico Capital’s investors anticipated this situation well in advance and were looking for a timely exit from the business. But the potential buyers after due diligence backed off. However, as of now, creditors like banks and mutual funds are looking at significant haircuts in Altico.
The situation of this NBFC, though unresolved yet, could well be the likelihood of more such real estate exposed lenders facing a similar situation.