Moody’s downgrade Macrotech (Lodha) Developers on debt refinancing uncertainty

Global credit ratings agency Moody’s has downgraded one of India’s largest real estate developers citing weak liquidity position and uncertainty over its debt refinancing plan. The move comes amid slow sales growth and a liquidity crunch in the non-banking financial services sector, which has impacted the realty sector.

Moody’s downgraded Macrotech Developers Limited’s (formerly Lodha Developers) corporate family rating to Caa1 from B3. The outlook is also negative, which reflects Moody's expectation that there could be delays with respect to the company's ongoing initiatives to refinance its upcoming debt maturities.

The senior unsecured rating of the US dollar-denominated bonds issued by Lodha Developers International Limited and guaranteed by Macrotech Developers (MDL) has also been downgraded to Caa1 from B3.

“The downgrade to Caa1 reflects the continued uncertainty with respect to the refinancing of MDL’s upcoming debt maturities,” said Sweta Patodia, analyst at Moody’s.

"While the company has made some progress in its refinancing efforts, its measures to date do not completely alleviate the significant refinancing risks," Patodia added.

For the year-ended March 31, 2019, MDL reported a net profit of Rs 1,217 crore on revenue of Rs 9,515 crore.

MDL’s gross debt increased 13 per cent year-on-year to Rs 25,640 crore in FY2019, mainly led by drawdown of construction finance loan for its London projects, India Ratings and Research said in September, downgrading the company’s debt instruments to BBB- from BBB+, citing “elevated refinancing risks” over financial years 2020-2021.

According to Moody’s, MDL has in place an executed loan agreement for $155 million, secured against the unsold inventory at Lincoln Square, one of its London projects. However, drawdowns under this facility remain subject to receiving the practical completion certificate for all units at the property, which is expected by December 2019, it said.

MDL also expects to secure another credit facility of around $195 million against the unsold inventory at its second London project Grosvenor Square. However, documentation for this facility is currently in progress and is likely be completed over the next few weeks, noted Moody’s.

“These two facilities constitute the company's primary source to refinance the upcoming bonds. However, given that the facilities cannot be drawn down immediately, and remain subject to the fulfilment of certain conditions, liquidity risk remains elevated,” it said.

MDL has plans to set up a rupee denominated facility, which will be fully secured against the inventory at its Indian operations. It also plans to monetise one of its commercial assets in the country.

“The proceeds from these initiatives, if completed as planned, would provide alternate sources to refinance the balance of the US dollar bonds and the debt at its onshore operations,” said Moody’s.

It added that the ratings outlook would be revised to stable if the company can put in place definitive funding sources to refinance the bond in its entirety and is able to draw down on these facilities.

MDL, considered to be the country’s largest real estate developers by sales, has 33.8 million square feet of prime real estate being developed across 39 ongoing projects, according to its website. It claims to have delivered 19,670 homes over 2017-18 and 2018-19. 

MDL, in response to the Moody's rating downgrade, said it has in place arrangements for 100 per cent repayment of it's $325 million bond and the dollar bonds are not related to the Indian business.

"Given the recent negative view taken by the international rating agencies on the Indian economy and various Indian corporates, it appears that Moody's has chosen to downgrade the rating on this bond," the company said.

The downgrade will have no impact on the India business and it remains optimistic on the future growth of affordable housing, office and logistics space, it added.