Now Fitch, Too, Downgrades Lodha, Warns Of More Rating Cuts

Global ratings agency Fitch has downgraded the leading real estate player Macrotech Developers, formerly Lodha Developers, due to the concerns on liquidity management.

Any rating below BBB- is junk or below investment grade and the city's largest developer already had a junk rating by foreign rating agencies. Lodha, founded by Mangal Prabhat Lodha, who heads the ruling Bharatiya Janata Party’s city unit, has excessive dependence on the troubled non-banking finance companies, which are now shying away from lending as they themselves are in deep trouble, narrowing its refinance options, the agency said Friday.

The downgrade of its long-term issuer default rating to 'B-' from 'B' comes days after rival agency Moody's had made a similar move. Fitch has also downgraded the rating on a $325- million senior, unsecured bond by the international arm of the company, priced at 12 percent and due March 2020, to 'B-'. In what spells trouble for the company, Fitch has also placed all ratings on 'rating watch negative'.

The lack of refinancing options due to the NBFC crisis coincides with the maturity of the $325 million bonds, a note by the agency said. There will be "significant challenges" for the company in meeting its debt maturities of Rs 1,600 crore in the remainder of FY20 and Rs 5,000 crore in FY21, the agency said, conceding that the company has repaid debt of Rs 9,000 crore in FY18 and Rs 4,800 crore in FY19 when liquidity was easier.

Mitigating the risks are factors like improved lending appetite of some domestic banks and alternative financing providers such as private equity funds that continue to lend to the company due to its strong market position, and its large unencumbered land bank, the agency said. But the agency further warned that Lodha's junk ratings can be downgraded by over one notch more if it is unable to refinance or repay $325-million bond due in March 2020.

Till FY22, Lodha has domestic debt of Rs 11,600 crore maturing and the risks around the same are "rising" due to the tight liquidity conditions faced by NBFCs which have been a key source of funding for the company. Borrowings from NBFCs accounted for 56 percent of its outstanding domestic debt in FY19, and 58 percent of domestic debt due FY21, it said.

"We believe Lodha would find it challenging to repay a majority of its debt through project cash flows as we expect an onshore cash flow (from operations) deficit of Rs 850 crore in FY21," Fitch said. On alternative sources, the agency said Lodha has Rs 1,030 crore of committed undrawn credit lines from banks and also a large land bank near Dombivili with the unpledged value of Rs 33,400 crore.

"However, tighter domestic liquidity raises the risk that the unpledged Palava land may yield a lower value should the company be required to sell part of it to repay the debt, or lenders may require higher collateral cover to compensate for the increased valuation risks in the light of the fund crunch," it said.

In FY19, Lodha saw a 12 percent decline in sales at Rs 7,200 crore, on weaker demand, which is expected to rise to Rs 7,600 crore in FY20 and Rs 7,900 crore in FY21.

The agency has also lowered pre-sales forecast for Lodha's London projects to Rs 700 crore from Rs 800 crore earlier in FY20 on heightened uncertainty over the Brexit, but maintained that the same will increase in FY21.