Fitch Downgrades Macrotech Developers (Lodha) to 'B-' on Weak Liquidity Management
Fitch Ratings has downgraded India-based real-estate developer Macrotech Developers Ltd's (MDL) long-term issuer default rating (IDR) to 'B-' from 'B' due to the company's weak liquidity management. Fitch has also downgraded the rating on the erstwhile Lodha Developer's $325 million 12% senior unsecured bond due March 2020 to 'B-' with a recovery rating of 'RR4' from 'B'/'RR4'. Fitch has simultaneously placed its all ratings on Macrotech Developers on rating watch negative (RWN).
The 12% senior secured bonds were issued by Lodha Developers International Ltd and guaranteed by MDL and certain subsidiaries.
Fitch Ratings says, "MDL, formerly known as Lodha Developers, has relied on funding from domestic non-bank financial institutions (NBFI), including housing-finance companies, which are now shying away from lending to the property sector. The company's refinancing options have therefore narrowed as the onshore funding squeeze is coinciding with the maturity of its $325 million bond.
The company was founded by Mangalprabhat Lodha, a member of legislative assembly (MLA) from Mumbai and chief of Bharatiya Janata Party (BJP)'s city unit. Any rating below BBB- is junk or below investment grade and Lodha, the largest developer in Mumbai region has already been having a junk rating by foreign rating agencies.
MDL has Rs2,000 crore of onshore debt maturities in FY20, a construction loan of 290 million pounds (about Rs2600 crore) due 21 December 2020 for its project at 48 Carey Street in London, and the $325 million (around Rs2,300 crore) unsecured bond due 13 March 2020.
Fitch says it expects cash collected at 48 Carey Street over the next few months to be sufficient to meet MDL's 290 million pound loan. "MDL has shared details of a financing package from an existing offshore lender to repay the $325 million bond, and we expect this facility to be finalised in the next two to three months although execution risks remain. We expect FY20 onshore debt maturities to be mostly manageable as some domestic banks appear willing to lend to reputable property developers with good quality projects such as MDL," it added.
MDL owes 58% of its Rs5,000 crore in FY21 onshore debt maturities to NBFIs and housing-finance companies for which the ratings agency believes the company will have to seek alternative funding particularly if the ongoing liquidity crisis among NBFIs persists. It says, "We forecast a cash flow deficit of Rs3,700 crore in FY21, conservatively assuming that the company will be able to obtain bank financing to fund at least 50% of its construction costs. MDL says it is negotiating with an existing onshore lender for a term facility secured against completed inventory in onshore projects, which will help the company to meet a substantial part of the Rs3,700 crore cash flow deficit. The company is also in negotiations to sell two of its commercial properties valued at Rs1,700 crore in aggregate, which can help cover the balance. MDL also has a 517 million pound (about Rs4,700 crore) construction loan at its project at 1 Grosvenor Square in London due March 2021."
According to Fitch Ratings, the change in the domestic funding environment will present the company with significant challenges in meeting its debt maturities of Rs1,600 crore in the remainder of the financial year ending March 2020 (FY20) and Rs5,000 crore in FY21, although it repaid debt of Rs9,000 crore in FY18 and Rs4,800 crore in FY19 when liquidity was easier. "The risks are mitigated by the appetite of some domestic banks and alternative financing providers such as private-equity (PE) funds that continue to lend to the company due to its strong market position, good quality projects, and large unencumbered land bank,"it added.
Fitch says, its RWN reflects near-term risk that MDL's ratings could be downgraded by more than one notch if the company is unable to refinance or repay the $325 million bond due March 2020. MDL had told the ratings agency that it was in advanced stages of negotiations to secure sufficient funds to repay the bond.
If the company is able to complete the refinancing, Fitch says it would consider removing the RWN.
According to the ratings agency, MDL has very high exposure to NBFI debt. Borrowings from NBFIs accounted for 56% of MDL's outstanding domestic debt at FYE19, and 58% of domestic debt due FY21. "We believe MDL would find it challenging to repay a majority of its debt through project cash flows as we expect an onshore cash flow from operations (CFFO) deficit of Rs850 crore in FY21," it added.
MDL had Rs1,030 crore of committed undrawn credit lines from banks as of 30 June 2019, and the company says it secured these facilities to fund construction costs around six to 12 months in advance. The banks' continued provision of term loans to fund the company's construction costs should help to partly cover its upcoming funding needs, Fitch feels.
It says, "We believe MDL would need to rely on alternative sources such as private equity (PE) funds, possibly at a higher cost and under tighter conditions such as higher collateral cover, to displace its reliance on NBFIs in meeting its debt repayments. The company may, to a lesser extent, also have to rely on proceeds from the planned sale of two domestic commercial assets. MDL says it is currently negotiating a long-term facility of Rs2,000 crore with an existing PE lender, which if successful would help mitigate the FY21 debt-repayment risk."
MDL has 3,350 acres of unpledged land at Palava, near Kalyan in Maharashtra with an enterprise value of Rs33,400 crore, according to an independent valuation report, implying a price of Rs10 crore per acre. The company completed the sale of a parcel of the Palava land in December 2018 to Piramal and Ivanhoe Cambridge at a similar price per acre to that of the external valuation.
However, Fitch says, the tighter domestic liquidity for property developers raises the risk that the unpledged Palava land may yield a lower value should MDL be required to sell part of it to repay debt, or lenders may require higher collateral cover to compensate for increased valuation risk in light of the scarcity of available funds.
During FY19, Lodha sold a property worth Rs7,200 crore, which was 12% down compared with past year. "We believe the lower sales were driven by demand that was weaker than we had expected and the near-term effect of a lower goods and services tax on under-construction properties from FY20, leading to some customers postponing their purchases. We expect domestic pre-sales to rise to Rs7,600 crore in FY20 and Rs7,900 crore in FY21, supported by demand growth in the affordable segment amid a substantial housing deficit and government initiatives. Collections in FY19 were strong at Rs9,200 crore(FY18: Rs9,100 crore), but are likely to moderate on weak FY19 domestic pre-sales of Rs7,200 crore (FY18: Rs8,100)," the ratings agency says.