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India gears up for first asset-backed property bonds

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DLF is in talks to raise up to Rs 10 billion in a bond backed by lease rentals from two malls by the end of this year. (Reuters) DLF is in talks to raise up to Rs 10 billion in a bond backed by lease rentals from two malls by the end of this year. (Reuters)
SummaryBonds would open new source of capital for the sector weighed down by $22 bn bank debt

Indian property firms, including DLF Ltd, are gearing up to sell the country's first bonds backed by rental income from their office buildings and shopping malls.

The bonds would open a new source of capital for a commercial property sector weighed down by $22 billion of bank debt and sluggish rentals, and come on the heels of new rules allowing developers to raise money through real estate investment trusts (REITs).

Property and infrastructure lender IDFC Ltd is at the most advanced stage, with plans to sell at least 3 billion rupees ($48.7 million) in a debt security backed by lease rentals from an IT park in Noida, outside Delhi, and a special economic zone in Pune, said people involved in the discussions.

IDFC declined to comment.

DLF Ltd, India's biggest listed developer, is in talks to raise up to 10 billion rupees in a bond backed by lease rentals from two malls by the end of this year, the people said. The developer has in the past talked about raising funds through such a vehicle. Developer K. Raheja Corp is also pursuing an asset-backed deal, but is proceeding slowly, Neel Raheja, group president, told Reuters.

Credit Suisse and JP Morgan are among banks tapping property companies and investors to gauge their interest in the structure, the people said. Both banks declined to comment.

"Bankers have pitched deals for IDFC and DLF to us. We are assessing the risk of the product and waiting for the rating," said a senior fund manager who declined to be named because the talks were not public. He said IDFC was likely to issue the first such bond, within a month.

MORE LRD THAN CMBS

While the bond structure is loosely referred to in India as a commercial mortgage-backed security (CMBS), it differs from a CMBS in the United States or Europe, under which lenders securitise mortgages on commercial property.

Rather, DLF and IDFC's proposed bonds would be similar to so-called lease-rental discounting (LRD), sold in a bond. Rental income is used to pay the interest to the bond investor, while the principal is repaid at maturity, the people said. In an LRD, the principal is amortised over the life of the debt.

Both DLF and IDFC are considering bonds with 5-year maturities and an option to extend the borrowing to 7 years. The debt would be issued by a special purpose vehicle that owns the underlying property and

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