August 29, 2017 / 8:18 AM / a year ago

Fitch Maintains Lodha's 'B' IDR on Rating Watch Negative

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, August 29 (Fitch) Fitch Ratings has maintained the Rating Watch Negative (RWN) placed on Lodha Developers Private Limited's (Lodha) 'B' Long-Term Issuer Default Rating (IDR) and the 'B' long-term rating on its outstanding USD200 million 12% unsecured unsubordinated notes due 2020. The RWN reflects the possibility that Lodha may not be able to complete the refinancing of the GBP225 million loan for its prime residential Mayfair development in London by end-September 2017. Fitch may affirm Lodha's ratings with a Stable Outlook if the company is able secure timely refinancing of the loan and obtain the construction (or similar) financing it needs for the project. A Stable Outlook would also reflect the strong performance of Lodha's Indian operations, with healthy presales and cash collections in spite of challenging market conditions. Fitch may downgrade the ratings by more than one notch if the company is not able to secure timely refinancing for its London project. Lodha's ratings were placed on RWN on 28 July 2017 following the company's announcement that it was seeking the consent of the holders of its US dollar notes to amend certain covenants in indenture so that it can reorganise, and to waive a breach of covenants. On 14 August 2017, Lodha said it had received the requisite consent from its unsecured noteholders to waive the breach of the restricted payment covenant, and to reorganise its operations to make its London properties part of the restricted group. Ownership of the London properties will also increase to at least 75%. The company expects to conclude the reorganisation by 15 January 2018. The US dollar notes are issued by Lodha's wholly owned subsidiary, Lodha Developers International Limited, and guaranteed by Lodha and certain subsidiaries. KEY RATING DRIVERS London Project Refinancing Risk: Lodha is currently in discussions with lenders to refinance its London project loan and to fund the project's estimated GBP197 million balance in construction cost. The development was formally launched in May 2017 and GBP80 million has been sold as of June. Demand for Mayfair prime property has been less affected than other prime areas in Central London since the Brexit vote last year and may help Lodha's ability to secure the construction financing. Lodha was able to secure 30-month construction financing of GBP290 million for another residential project in London earlier this year, with a bullet repayment of principal. Lodha launched sales of this project, the smaller of the two, in April 2016, and had sold around GBP120 million of properties by June 2017. Rating Unaffected by London Amalgamation: On a pro forma basis as of 31 March 2017, Fitch estimates that Lodha's consolidated leverage (defined as net adjusted debt/adjusted inventory) would drop to 72% if the London business were amalgamated, from 80% previously. At 31 March 2017, the London business had external debt of INR26.4 billion and adjusted inventory of INR60.7 billion, which amounts to a leverage ratio (defined as net debt/adjusted inventory) of 43%. Our leverage ratios exclude the London business' outstanding loans payable to Lodha. Strong Sales, Cash Collections: Lodha continued to report robust property presales and cash collections in India for the quarter ended 30 June 2017 (Q1FY18, fiscal year ends 31 March), compared with our full-year FY18 presales expectation of around INR70 billion (FY17: INR69.2 billion) and cash collection expectation of INR77 billion. The company's collections are speeding up due to a number of its large projects coming to a close this year. Strong sales in FY17 were also supported by the company's Palava project, which benefits from the Indian government's push on affordable housing including the announcement of its infrastructure status, and tax and interest-cost incentives to buyers. Fitch expects Lodha to sell around INR30 billion of properties in London annually, between FY18 and FY20. DERIVATION SUMMARY Lodha's 'B'/RWN rating compares well against peers Indiabulls Real Estate Limited (IBREL, B+/Stable) and Xinyuan Real Estate Co., Ltd. (B/Stable). Lodha has a stronger business profile compared with IBREL with nearly twice the operating scale, and a better track record of sales and execution over the last three to four years. However, Lodha's leverage is considerably higher than IBREL's, which drives its lower rating. Xinyuan is a small regional developer in China that has weaker business risk compared with Lodha. A key weakness for Xinyuan is its need to constantly replenish its land bank amid rising land costs. However, Xinyuan's substantially lower leverage compared with Lodha balances out these risks. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - India presales of around INR70 billion and INR90 billion in FY18 and FY19 - India cash collections of around INR75 billion-80 billion annually in FY18-FY19 - India construction cost of around INR50 billion in FY18 - London properties annual presales of around INR30 billion between FY18-FY20 - London properties cash collections of around INR17 billion in FY19 and INR60 billion in FY20 - London properties construction cost and other expenses of around INR12 billion annually in FY18-FY19 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Should Lodha refinance its London project debt and secure term financing to fund the balance in construction costs of the project as intended, then Fitch may affirm the company's ratings with a Stable Outlook Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -If the company is not able to secure timely refinancing for its London project, then Fitch may downgrade the ratings by more than one notch LIQUIDITY Refinancing Risk: The RWN reflects the September 2017 maturity of the GBP225 million facility that was used to fund one of the company's London properties. The company is currently in the process of negotiating the refinancing of this facility. In terms of onshore debt, Lodha had more than INR28 billion of approved but undrawn credit facilities as of 30 June 2017, compared with around INR37 billion of contractual debt maturities in FY18. Lodha indicated that it has already secured refinancing for around INR7 billion of these maturities, and it is currently in discussions with lenders to refinance around half of the balance of INR30 billion. Lodha says it has a further 3,000 acres of unencumbered land in its Palava project, valued at around INR150 billion (over USD2 billion) based on land value, as well as an estimated INR40 billion of completed inventory by end-FY18, which the company can pledge to non-bank financial institutions in order to secure contingent liquidity, if required. We expect Lodha to continue to generate negative free cash flow in FY18, for which we believe the company will be able to secure financing given its business risk profile as one of India's leading homebuilders. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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