Reducing Developer Concentration

We also continue to make efforts to reduce developer concentration to lower the risk profile of our loan book. As of March 2019, our Top 10 developer exposures constituted less than one-third of our overall loan book.

Going forward, we plan to further reduce single borrower exposure. However, consolidation in the real estate sector and the shift in market share towards larger, well-organised, quality developers will create a significant opportunity for us to continue to work with Tier I clients and enable them to gain market share in this phase of consolidation.

Nevertheless, in our endeavour to reduce developer concentration, while continuing to participate in deals by these quality clients, we have created a pool of like-minded partners, such as foreign banks and pension funds, who will co-lend with us. We will also generate fee income through such co-investment deals, as we would take a lead in these transactions in terms of underwriting, asset monitoring and loan servicing.

JV WITH BAIN CAPITAL CREDIT

Indian Distressed Asset Market

For decades, India lacked efficient resolution mechanisms and enforcement laws for distressed companies. Previously, resolution mechanisms were ineffective as they neither drove real resolutions nor were they time bound. This eventually resulted in the incumbent stress of nearly ₹15 Lakh Crores, which adversely impacted capital availability and credit growth in the economy.

Under the Insolvency and Bankruptcy Code (IBC), introduced in 2016, a failure to pay dues on time by the borrower would result in a shift of controls to the hands of the creditor(s). The IBC aims to rescue and drive resolutions of defaulting borrowers in a time-bound manner, and provides a moratorium to facilitate the resolution and empowers creditors to take decisions on the resolution of borrowers’ debt, backed by the National Company Law Tribunal (NCLT).

As of March 2019, a total of 1,858 corporate debtors were admitted under the IBC and nearly `1.7 Lakh Crores of unpaid claims of financial creditors were resolved (yielding a 43% realisation on their admitted claims). Over the next six months, nearly `1 Lakh Crores of unpaid claims are likely to be resolved, once the final rulings on the ongoing litigations come in.

With a large quantum of assets still to be resolved, in capital-intensive sectors such as power, steel, Engineering Procurement Construction, textiles, telecom and industrials, we expect distressed asset resolution to remain an overarching theme for the Indian economy. In turn, the sheer magnitude of distress and complexity requires active participation of third-party capital and best-in-class turnaround capabilities.

Fund Overview and Mandate

In August 2016, PEL entered into a JV with Bain Capital Credit to tap into Indian distressed market opportunity. PEL and Bain Capital Credit each committed $100 Million to India Resurgence Fund (IndiaRF), which invests capital directly into businesses and/or acquires debt of distressed businesses to drive restructuring with active participations in their turnaround. The Fund’s mandate is to look at all sectors, except real estate, for distressed assets. The preference is for businesses that have fundamentally strong growth prospects linked to India’s infrastructure and consumption needs and require restructuring.

The Fund aims to drive a resolution plan focused on specific financial and operational turnarounds with dedicated management oversight, as it looks to protect the sustainable debt value and maximise stakeholder value.

Our Differentiated Positioning and Strategy

Progress So Far

The Fund’s platform is fully operational and includes a licence for an asset reconstruction business.

In November 2018, IndiaRF concluded its first transaction by investing $156 Million along with its affiliates in a company in the marine chemicals business, in the form of debt and equity. The Fund’s investment has gone towards substituting current debt with more flexible commercials linked to a business turnaround, working capital financing and capex for business expansions into new lines of existing products and diversification into downstream derivatives over time. The Fund is working closely with the Company’s management to implement the turnaround plan.

IndiaRF, along with its affiliates, invested $144 Million in a pharmaceutical and vaccines player through non‑convertible debentures and share warrants in April 2019. The investment proceeds will be used for a one-time settlement with existing lenders, general working capital and growth requirements of the Company. Further, IndiaRF aims to work with the promoters and management team to provide long-term strategic solutions that enable an effective turnaround driving sustainable revenue growth and improvement in profitability.

PROGRESS ON JV WITH IVANHOÉ CAMBRIDGE

In February 2017, PEL had announced a strategic co-investment platform with Ivanhoé Cambridge to provide long-term equity capital to top-tier residential real estate developers across India. Ivanhoé Cambridge had committed an initial $250 Million for both pure and preferred equity transactions. PEL had committed to co-invest 25% of pure equity transactions and 50% of preferred equity transactions, with the balance coming from Ivanhoé Cambridge. The platform’s investment focus included the Mumbai Metropolitan Region, Delhi NCR, Bengaluru, Pune and Chennai.

In February 2019, Piramal and Ivanhoé Cambridge announced an equity investment of `500 Crores in a smart city being developed by a large developer, located in the Mumbai Metropolitan Region. This was the first deal through the Piramal-Ivanhoé Residential Equity Fund. The investment was made towards enabling the development of the second phase of the project, an established integrated smart city near Mumbai with over 4,500 acres of land under development across phases. While Phase I has already been delivered, the Fund’s investment is towards Phase II, which is spread across ~700 acres and is currently under development with a potential saleable area of ~57 Million sq. ft.

The Fund is evaluating several other deals with Tier I developers across Mumbai, Bengaluru, NCR, Pune and Chennai. The objective is to invest in high-quality real estate properties, with a long-term view to generate optimal, risk-adjusted returns.

PROGRESS ON STRATEGIC ALLIANCE WITH APG ASSET MANAGEMENT

PEL and APG Asset Management (a Dutch pension fund asset manager) have a strategic alliance for investing in rupee-denominated mezzanine instruments issued by India’s infrastructure companies and focus on operational and near-completion projects with limited execution risks and high visibility of cash flows coming from a portfolio of projects.

Under this 50:50 strategic alliance, PEL and APG jointly committed `4,745 Crores as on March 31, 2019. Of this, `3,799 Crores were disbursed jointly by APG and PEL across five deals in the renewable energy and infrastructure sectors. The investments were used primarily towards growth capital and to provide exit to existing investors. In the Renewable Energy space, the investments have helped facilitate an increase in capacity across the country.

PROGRESS ON STRATEGIC ALLIANCE WITH CPPIB

PEL has a strategic alliance with CPPIB Credit Investments Inc., a wholly owned subsidiary of CPPIB, to provide rupee debt financing to residential projects across India’s major urban centres. Under this alliance, PEL and CPPIB have jointly invested in one transaction in the NCR, which has been fully exited.

BORROWING SIDE

Market Scenario & Key Developments

In September 2018, the default on payment obligations by IL&FS Group companies on their debt instruments raised concerns over asset liabilities mismatches at NBFCs. We saw banks and mutual funds become cautious towards financing NBFCs.

PEL was relatively better positioned during the liquidity tightening situation. The Company received sufficient liquidity from banks and mutual funds during this period of tight liquidity, due to the credibility of our Group, our balance sheet strength, relatively low leverage levels and strong track record of growth, asset quality and returns profile. Since September 2018, we have raised nearly `16,500 Crores through bank loans and Non-convertible Debentures (NCDs).

Funding Sources

The Company primarily sources funds through term loans, NCDs and commercial papers. Our borrowings are primarily long term in nature, with the predominance of term loans and NCDs in the funding mix.

The Company reduced its Commercial Papers (CP) exposure to ~`8,900 Crores as of March 2019 from ~`18,000 Crores as of September 2018.

Cost of Borrowings

The average cost of borrowings was 9.0% in FY2019, marginally higher from FY2018. The increase in funding costs reflects the system-wide liquidity shortage following the default by IL&FS in September 2018 and the shift in the borrowing mix towards long-term sources of funds.

We continue to closely monitor our borrowing costs by selecting the right mix of funding sources while carefully managing our asset liability profile.

Measures in the Pipeline to Strengthen Liquidity and Funding Profile

The Company is taking additional steps to further strengthen its liquidity position and diversify its borrowing profile. Some of these measures include (a) long-term funds from PSU institutions, (b) Tier II offering, (c) maiden ECB issuance, (d) foreign currency borrowings and (e) additional bank lines.

Capital Adequacy Ratio

As of March 31, 2019, PCHFL’s Tier I ratio was 27.2%, marginally higher than 26.9% as of March 31, 2018 and well above the minimum regulatory requirement prescribed by the RBI.

Borrowing Mix for PCHFL

Pre-sanction Process

At the pre-qualification stage of financing projects, the Company is very selective of the developers or businesses to which it provides funding. It takes into consideration a multitude of factors i.e., management risk, business risk, financial risk as well as structural risk. Specifically, factors such as the promoter’s track record, market reputation, balance sheet and the status of the projects/business are taken into consideration. It primarily selects projects that are located in select micro-markets in Tier I cities of India.

At the pre-approval stage, the Company analyses the potential investment by leveraging Brickex, our in-house real estate distribution arm, to verify price, ticket size and sales velocity assumptions. For corporates, detailed due diligence of business and its financials are conducted along with detailed market feedback. Moreover, every potential investment is subject to a standard risk scoring system by the Risk team to measure risks associated with the investment.

Also, our long-standing strategic partnerships with marquee investors such as CPPIB, CDPQ and APG, who independently assess each investment, serves as an external validation of our investment thesis and decisions. The financing is structured in a manner that links the disbursements of loans to the milestones linked to sales/ collection of rental income, etc.

The Company maintains independence among the Risk, Legal and Investment teams so that investment decisions can be overruled by its Risk or Legal team, if required. In addition, its investment committees include independent directors and third-party external experts who keep an independent check on the quality of the transactions.

The Company maintains a healthy security and cash cover, which varies across deals, based on its conservative underwriting assumptions, with the ability to enforce security. Also, all our deals follow the escrow mechanism and hypothecation of receivables, resulting in visibility and control of project-level cash flows.

Post-sanction Process and Asset Monitoring

As part of its constant asset monitoring efforts, the business has set up dedicated local teams in cities where it has investments. The local teams constantly assess the performance of each project from the time of its initial investment up to the Company’s exit or completion of such investment. Most importantly, this helps the business continuously ‘cure’ its investments by proactively measuring actual progress versus underwriting assumptions and immediately react to any deviation, no matter how small, by taking a range of remedial measures such as increasing security, modifying business plan, adopting a new marketing strategy, changing the sweep ratio of the designated escrow accounts or proactively seeking a refinance in some cases.

100%Project-level escrow accounts monitored every month, along with developer sales MIS and periodic site visits, across our real estate deals

This is the most important factor in maintaining a low incidence of Gross NPA ratio.

The team is monitoring more than 400 real estate projects, developed by 175 developers, including mid-market developers.