Moody’s Downgrades Macrotech’s Rating; Outlook Remains Negative

Moody’s Investors Services has downgraded the corporate family rating of Macrotech Developers Ltd., formerly called Lodha Developers, to ‘Caa1’ from ‘B3’ over liquidity concerns.

The corporate family ratings are opinions of a corporate group’s ability to honour all its financial obligations, according to Moody’s.

‘Caa1’ corporate family rating is primarily a reflection of the real estate developer’s weak liquidity position, the rating agency said in its report. The rating of U.S. dollar-denominated bonds issued by Lodha Developers International Ltd., and guaranteed by Macrotech, has also been downgraded to ‘Caa1’ from ‘B3’ earlier, it said, adding that the outlook on all the ratings remains negative.

“The downgrade to ‘Caa1’ reflects the continued uncertainty with respect to the refinancing of Macrotech’s upcoming debt maturities,” Moody’s said.

While the company has made some progress in its refinancing efforts, these measures do not completely alleviate the significant refinancing risks, the rating agency said. The company has $325 million worth of bonds maturing in March 2020.

Refinancing Efforts

• The company now 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. As per management estimates, practical completion certificates have been received for about 75 percent of the units in the development.
• The company expects to secure another credit facility of around $195 million against the unsold inventory at Grosvenor Square, its second London project. However, documentation for this facility is currently in progress and will likely be completed over the next few weeks.

The rating agency said that 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.

The company, according to Moody’s, also plans to set up a rupee denominated facility, which will be secured against the inventory at its Indian operations. It is also in the process of monetising one of its commercial assets in India. The proceeds from these initiatives, if completed as planned, would provide alternate sources to refinance the balance of the dollar bonds and the debt at its onshore operations, the rating agency said.

Besides, the company also has a $100-million credit line secured against the pledge of Macrotech’s shares available from a related party, which can be used to repay a portion of its upcoming maturities, Moody’s said. This, however, is the realty firm’s last resort and will only be utilised should any of the measures outlined above not materialise, it said. “Moody’s does not have visibility on the credit quality of the related party providing such facility.”

Meanwhile, a spokesperson from Macrotech Developers said the company has in place arrangements for 100 percent repayment of its $325 million bond and its dollar bonds are not related to its Indian business.

“Moody’s has recognised that Macrotech has made substantial progress in relation to the refinancing/repayment of its $325 million bond. They would like to see further progress on some of the issues which in our opinion has already been done but not recognised yet by Moody’s,” the spokesperson told BloombergQuint in an emailed response.

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 real estate developer said. “This downgrade has no connection or impact with our Indian business and we continue to remain confident and optimistic on the future growth of our affordable housing, office and logistics businesses.”

What Could Lead To Revision In Ratings?

Moody’s said it would revise the ratings outlook to stable if the company puts in place definitive funding sources to refinance the bond in its entirety and is able to draw down on these facilities. Upward pressure would start building if the company refinances its upcoming debt maturities within their respective due dates, it said.

On the other hand, Moody’s could downgrade the ratings if there is an increasing likelihood that the company will not be able to redeem the bonds in full on maturity. Indicators of such risks include:

• Failure to receive the proceeds from the sale of its commercial property in India.
• Delays in receiving the practical completion certificate for the units at Lincoln Square beyond December 2019, which would impact company’s ability to draw down on the inventory financing facility.
• An inability to refinance the upcoming debt maturities and arrange for additional facilities, including the second tranche of the inventory financing facility, over the next few weeks.

Moody’s had last downgraded Macrotech to B3 in August 2019 citing liquidity risk as the key reason. Macrotech’s total debt at the end of financial year 2018-19 stood at Rs 17,201 crore, according to the real estate firm’s annual report,