CRISIL today announced its rating on India's first commercial mortgage-backed securities (CMBS) to be issued by DLF Emporio and DLF Promenade. The issuers, which are step-down subsidiaries of DLF (rated ''CRISIL A/Stable/CRISIL A2+''), operate two malls in south Delhi. This innovative transaction represents another milestone in the increasing sophistication of India's corporate bond market, and opens up a completely new fund-raising avenue for the real estate sector.
Pawan Agarwal, senior director, CRISIL Ratings, said, ''This first CMBS issuance in India shows how realtors can diversify their funding source. The corporate bond market can facilitate access to fixed-rate, long-term finance for realtors who have a portfolio of steady lease-income-generating assets. The CMBS structure provides a fine balance between the issuer's need for funding and the investor's need for safety.''
Under CMBS, funds available with the issuer during the tenure of the instrument are higher than lease rental-discounting loans from banks as these loans have a structure where principal repayment is amortised, whereas CMBS will typically have a bullet repayment. Further, CMBS instruments have the benefit of fixed interest rates and usually lower funding costs.
Investors draw comfort from a healthy interest service coverage ratio, because CMBS has minimal - if not nil - principal repayment during its tenure. This enhances the instrument‟s ability to withstand volatility in rental cash flows. And the risks to refinancing of the principal at the time of maturity are mitigated by a comfortable loan-to-value ratio, a key feature of the structure.
The features that further enhance the protection available to investors include assignment of future lease rentals, creation of an escrow mechanism, pledge of shares, right of sale, mortgage of property, and availability of adequate debt service reserve account. These structural characteristics enable delinking the rating on these instruments from the parent's credit risk profile.
Somasekhar Vemuri, senior director, CRISIL Ratings, said, ''CRISIL has rated yet another pioneering instrument, reflecting our commitment to support innovation in the Indian bond market. We developed the CMBS rating criteria factoring the unique characteristics of the Indian real estate sector. Our rating methodology entails a rigourous evaluation of the cash flows, legal and other structural aspects of the transaction.''
Benefits of CMBS to Issuers:
> The rating of CMBS can be higher than that of parent because of structural features, which lowers the borrowing cost
> The instrument transforms a relatively illiquid asset (real estate) into a tradable bond
> It opens a new funding avenue (beyond bank lending) for realtors who have a portfolio of stable lease-income-generating assets
> Bullet repayment of principal provides issuers with a higher quantum of funds during the tenure of the instrument vis-à-vis lease rental discounting loans
Benefits of CMBS to Investors:
> Since CMBS would be rated in higher rating categories, it helps attract investors who have appetite only for high rated instruments
> Bullet repayment reduces the reinvestment risk for investors
Additionally, CMBS issuances provide an opportunity for realty investors to invest in tradable instruments, resulting in development of the corporate bond market.
