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Fitch Affirms Lodha Developers at 'B'; Off Rating Watch Negative ; Outlook Stable
October 13, 2017 / 10:13 AM / a month ago

Fitch Affirms Lodha Developers at 'B'; Off Rating Watch Negative ; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, October 13 (Fitch) Fitch Ratings has affirmed India-based homebuilder Lodha Developers Private Limited's Long-Term Issuer Default Rating (IDR) at 'B' and assigned the rating a Stable Outlook. The rating on the outstanding USD200 million 12% senior unsecured notes issued by Lodha Developers International Limited and guaranteed by Lodha and certain subsidiaries has also been affirmed at 'B', with Recovery Rating of 'RR4'. Simultaneously all ratings have been removed from Rating Watch Negative, on which they were placed on 28 July 2017. The affirmation of the ratings follows the company's confirmation that it has secured GP517 million in construction finance for the development of its property project at One Grosvenor Square (1GSQ) in London's Mayfair, and successfully refinanced the bridging loan of GBP225 million. The Stable Outlook on Lodha's Long-Term IDR reflects the strong performance of Lodha's Indian operations, with healthy presales and cash collections in spite of challenging market conditions. KEY RATING DRIVERS London Refinancing Addressed: With the completion of its 1GSQ financing, Lodha has now achieved financial closure for both its London projects. The new loan will be drawn down in stages until the completion of the project, which the company expects will be by end-2019, with bullet principal repayment several years later. Lodha launched the project in May 2017 and has had GBP45 million of sales from the project at end-June 2017. Demand for Mayfair prime property has been less affected than other prime areas in Central London since the UK's vote to leave the EU last year, and supports our view that sales for these projects will remain healthy. Earlier this year, the company also secured 30-month construction financing of GBP290 million for its project in London's Carey Street, with a bullet repayment of principal. Lodha launched sales of this project, which is smaller than 1GSQ, in April 2016, and had sold around GBP130 million of property by June 2017. Strong Sales, Cash Collection: Lodha continued to report robust property presales and cash collections in India for the fiscal first quarter ended 30 June 2017. We expect around INR70 billion in presales and INR77 billion in cash collection for the fiscal year ending 31 March 2018 (FY18), compared with INR69.2 billion and INR76 billion, respectively, in FY17. The company's collections are speeding up due to a number of its large projects being completed this year. Sales were strong in FY17, driven by the Palava project in Maharashtra, which benefited from the Indian government's push to provide affordable housing that included providing tax and interest-cost incentives to buyers. Steady Leverage Expected: We currently expect Lodha's leverage to remain steady at around 70% in the next two years, supported by the company's strong domestic performance. 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 have dropped to 72% if the London projects were amalgamated, from 80% without the amalgamation. DERIVATION SUMMARY Lodha's 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 more than INR40 billion in FY18 - London properties' annual presales of around INR30 billion in 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 Key Recovery Rating Assumptions: - The recovery analysis assumes Lodha would be liquidated in a bankruptcy rather than continue as a going-concern because it is an asset trading company. - For the liquidation value, 100% of the London properties are consolidated into Lodha's assets and liabilities. - Accounts receivable includes unbilled revenue, which will be billed when the property projects complete construction milestones. We have assumed a 75% advance rate against receivables and unbilled revenue. - Fitch has assumed a 100% advance rate against the book value of Lodha's consolidated adjusted inventory (including London assets). We estimate that the market value of Lodha's inventory is 2.0x that of its book value. This is because Lodha has posted a gross profit margin of around 50% over the last few years. - All of Lodha's pro-forma consolidated debt at FYE17, apart from the outstanding US dollar senior notes, have been treated as prior-ranking or secured debt. Prior-ranking debt also includes the full drawdown of GBP750 million of London debt, which is allowed as a carve-out under the amended bond documentation consequent to the consent solicitation process completed in August. - The above estimates result in a recovery of between 91% and 100% of Lodha's secured and unsecured debt, corresponding to a 'RR1' Recovery Rating for the senior notes after adjusting for administrative claims. Nevertheless, Fitch has rated the senior notes at 'B' with a Recovery Ratings of 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings criteria, India falls into 'Group D' of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Net debt/adjusted inventory sustained below 65% - EBITDA margin sustained above 30% (FY17: 36.7%) Developments That May, Individually or Collectively, Lead to Negative Rating Action - Net debt / adjusted inventory sustained at more than 80%- - A significant weakening in liquidity LIQUIDITY Satisfactory Liquidity: Lodha has approved and undrawn onshore credit lines of INR25 billion at 30 September 2017, compared with INR18 billion of onshore debt that is falling due in the next six months to end-March 2018. The company also has more than INR60 billion of completed inventory for which it has received the occupancy certificates from local authorities, part of which is unencumbered, and can be pledged for incremental financing if required. We expect Lodha to generate negative free cash flow in FY18, for which we believe the company to 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 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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