Goldman Gets No Alpha in India as Its Only 2015 Junk Bet Falters

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Goldman Sachs Group Inc. isn’t having much luck with Indian junk bonds after its sole recommendation for outsized returns this year suffered losses.

Dollar-denominated notes issued by India’s biggest house builder, Lodha Developers International Ltd., have lost 2.6 percent since Goldman added them to its Asian “alpha opportunities” in May, with the average Indian dollar bond losing 1 percent this year. The U.S. bank retained the notes on a “most favored” list last week, even after flagging concerns about rising stress among Indian borrowers in July.

Goldman’s ardor for Lodha’s bonds conflicts with analysts at Moody’s Investors Service and Fitch Ratings, who both cut the developer’s outlook to negative in June as property sales trailed targets, debt levels didn’t fall fast enough and cash collection slowed. Indian bank lending is near the slowest in over two decades as bad debts approach the most since 2001.

“Cash collection issues usually are the early sign of cracks,” said A K Sridhar, chief investment officer in Mumbai at IndiaFirst Life Insurance Co. “We would not prefer investing in real estate, and more so in such credits where there is high leverage and lack of clarity on the funding outlook.”

Slow Progress

Lodha’s cash-take fell below expectations in the fiscal year through March, due to weaker demand and slower progress of larger projects, according to Fitch. Its leverage, measured by net debt over net inventory less customer advances, rose to 91 percent from 77 percent a year earlier as a result.

Lodha Developers Pvt, which guarantees the $200 million of 12 percent bonds sold by its offshore unit in March, is ranked by Fitch at B+, or four levels below investment grade. Moody’s scores it at Ba3, one step higher. The notes have dropped to 99 cents on the dollar from about 104 since the Goldman call.

“Unless leverage can be brought down to more comfortable levels, there’s likely to be a rating downgrade,” Singapore-based Fitch analyst Hasira De Silva said this week. “We would look to Lodha to sell at least 110 billion rupees ($1.67 billion) worth of properties in the current fiscal year, which should help increase cash collections and bring down leverage.”

Jovita D’Souza, a spokeswoman for Lodha, declined to comment on questions sent by Bloomberg.

Shrug It Off

Lodha was among nine Asian junk bonds added to Goldman’s most favored list on May 19 -- including notes from five Chinese developers -- offering more than 8 percent yields. The lender was positive on the region’s high-yield market, saying it would shrug off concerns about rising U.S. interest rates and be helped by Chinese measures to stabilize growth.

Goldman hasn’t published anything on Lodha since its August 14 report and won’t comment on the company’s prospects, said Hong Kong-based spokeswoman Vicki Kwong.

Goldman’s only other Indian junk recommendation, made last year, is faring better. ICICI Bank Ltd.’s dollar bonds due in 2022 have gained 3.2 percent since the lender flagged them in September.

Among the bank’s May additions, all the Chinese builders except one have since delivered gains, while its calls on high-yield bonds from Singapore, Indonesia and Mongolia are in the red. In the same period, emerging market dollar-denominated junk bonds lost 4.3 percent on average, according to a Bloomberg-compiled index.

Zero Return

Buyers of Indian high-yield notes have lost an average 1 percent so far this year, while their Chinese counterparts surged 6.1 percent, Bank of America Merrill Lynch indexes showed. India Prime Minister Narendra Modi is seeking to propel growth in Asia’s third-largest economy as stalled projects and an investment slowdown curb demand for funding.

Still, Goldman’s other units are spending more there. The bank this month agreed to buy a minority stake in Piramal Realty Pvt, adding to a joint-venture with Nitesh Estates Ltd. in May to invest $250 million in Indian real estate.

Home sales in India’s top eight cities fell 4 percent in the quarter to June from a year earlier, with unsold inventory rising 18 percent, according to research and consulting firm Liases Foras Real Estate Rating & Research Pvt. Mumbai home prices slipped 2 percent in the June quarter and it will take 45 months to find buyers for unsold homes.

“There is a large amount of inventory and home sales are not happening fast enough,” said Sandip Kumar, an analyst at Liases Foras in Mumbai. “People are staying away because they don’t see the prospect of price appreciation, especially in the high-end markets.”

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