The company’s operating performance will remain well below our original expectations at the time we assigned the ratings for the first time in November 2014 and also below our reduced expectations in June 2015″, says Vikas Halan, Moody’s Vice President and Senior Credit Officer.
Moody’s has also downgraded the senior unsecured debt rating of the US dollar denominated bonds issued by Lodha Developers International Limited and guaranteed by LDPL to B1 from Ba3. The outlook on the ratings is negative.
RATINGS RATIONALE
The company made operating sales of INR64.3 billion for fiscal 2016 against Moody’s expectation of INR90-93 billion.
Cash collections of INR62 billion made during the year, though higher than last year’s collection by 14%, were lower than Moody’s expectation of INR75-80 billion for fiscal 2016.
The weak operating performance has also resulted in the increase in borrowings to INR133 billion as of 31 March 2016, compared to INR118 billion a year ago.
The management targets to achieve INR90 billion in cash collections in fiscal 2017. A substantial portion of the collection is expected to come from projects such as The Park and World Towers. The company also intends to collect a sizeable amount from sales made at the Palava City. Collections, however, will be a function of construction progress at these projects.
The negative outlook reflects a challenging operating environment for real estate companies in India and the company’s weak credit metrics and liquidity position.
LDPL’s liquidity profile is weak.
The company needs to refinance GBP75 million by June 2016 and another GBP225 million by December 2016. These debt maturities are with respect to the company’s London assets. Such large debt maturities are exposes the company to refinancing risk, which gets heightened because of uncertainties surrounding Britain’s possible exit from the Euro zone.
The company is in advanced stages of refinancing its debt maturing in June 2016 and we expect them to be able to refinance the same. Nonetheless, the refinancing risk will remain as the December maturity approaches.
In addition, the company had, debt maturing over the next 12 months of INR16.4 billion in India as of March 2016. Against this the company has indicated that it has already arranged for INR 15 billion of facilities that have been sanctioned by banks and remain undrawn. In addition, the company also had cash and cash equivalents of INR 3 billion as of March 2016. We expect the company to continue to access project construction loans for refinancing these borrowings. In absence of substantial progress on refinancing, the ratings will remain under pressure.
An upgrade in the ratings is unlikely, given the negative outlook. The outlook could be moved back to stable if there is a substantial reduction in the debt levels and improvement in liquidity either by way of a) improvement in operating performance or b) equity issue/ asset sales. Credit metrics indicative of such a scenario include a) cash and cash equivalents exceeding the debt maturing over the next 12 months; b) Revenue/Debt exceeding 80%; and c) Homebuilding EBITDA/Interest exceeding 3.0x on a sustained basis
The ratings could be downgraded further if the company fails to reduce its borrowings materially over the next 6 months. The ratings could also be downgraded further if the operating performance and liquidity position continues to decline or the company engages in any material debt-funded land acquisitions. Credit metrics indicative of such downward pressure include a) cash and cash equivalents staying below the debt maturing over the next 12 months; b) Revenue/Debt staying below 70% ; c) Homebuilding EBITDA/Interest falling below 2.0x on a sustained basis.
