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Rating agency Moody's downgrades Lodha Developer's ratings

Global ratings agency Moody’s Investors Service has downgraded the corporate family rating of city-based realty firm Lodha Developers (LDPL) to B2 from B1, citing reasons of weak liquidity position and high refinancing risk for such rating. It has also downgraded the senior unsecured debt rating of the US dollar denominated bonds issued by Lodha Developers International Ltd and guaranteed by Lodha Group to B2 from B1 and has given a negative outlook for the rating.

“The downgrade reflects our expectation that the operating environment for the Indian real estate sector will continue to remain weak post the demonetization exercise that took place in November 2016. Weak operating conditions will continue to pressure the company’s sales performance over the next 12-18 months,” Moody’s Assistant Vice-President and Analyst Saranga Ranasinghe said in a statement here. As a result, Lodha’s financial profile will no longer be consistent with the previous B1 corporate family rating, he said.

The negative outlook reflects the high refinancing risk, weak liquidity position and the challenging operating environment for real estate companies in India, the agency said. “Sales volumes in the Indian residential market decreased by more than 40% in fourth quarter of 2016 compared to the same period in 2015. As such, we expect LDPL’s operating sales to be 15-20% lower than Moody’s previous expectations of around Rs 7000 crore for this fiscal year,” it noted.

Moody’s further observed that operating sales over the next 12-18 months will remain at levels that will be substantially lower than those that would allow LDPL to generate excess cash flow to pay down debt. Lodha’s debt has continued to increase and stood at Rs 13,300 crore (excluding pro rata debt for the London properties) at the end of fiscal 2016. Increase in borrowings was largely driven by an increase construction spending to Rs 3800-4000 crore in the current year as compared to Rs 2900 crore in the previous year.

“Given this, Lodha’s key credit metrics will remain weak, with revenue/ adjusted debt at around 35-45% for fiscal 2017, positioning it more appropriately at the B2 rating level,” it said. LDPL has a high level of refinancing risk in regard to its London properties, particularly given ongoing uncertainties surrounding Brexit. “In this regard, the company expects to close development financing for one asset by April 17. The second asset has a facility expiring September 17 and the company will need to arrange for refinancing for the same,” the agency noted.

In addition, LDPL has a weak liquidity position with Rs 300 crore of cash at the end of fiscal 2016 against Rs 2200 crore of short term debt that needs to be refinanced during the 12 months ending December 2017. The company, however, continues to have access to project construction loans to refinance these borrowings. The company estimates that it has over Rs 3000 crore of undrawn credit lines and construction loans provided by relationship Indian banks.

“An upgrade in the ratings is unlikely, given the negative outlook. The outlook could return to stable if the company is able to refinance the short term debt maturities in London with longer term construction debt facilities. “At the same time, a stable outlook would require improvement in company’s credit metrics such that revenue/debt improves to above 55% and homebuilding EBIT/Interest exceeds 2.0x on a sustained basis,” it said. Further negative pressure on the rating could arise if the company’s operating performance and liquidity position fails to improve or it engages in any material debt-funded land acquisitions. The company reported contracted sales of Rs 6430 crore in FY16. LDPL is focused on residential development in the Mumbai Metropolitan Region with some projects in nearby Pune. The company along with its promoters has also expanded into the London market by acquiring two properties, which are now in the process of development.