Singapore, November 24, 2014 -- Moody's Investors Service has assigned a (P)Ba3 corporate family rating
(CFR) to Lodha Developers Private Limited ("LDPL"),
an Indian real estate developer.
At the same time, Moody's has also assigned a provisional (P)Ba3
rating to the proposed USD notes to be issued by Lodha Developers International
(Mauritius) Limited, a wholly owned subsidiary of LDPL.
The notes will be guaranteed by LDPL and all of its material Indian subsidiaries,
that is those generating more than 5% of the group's consolidated
EBITDA.
The outlook on the ratings is stable. This is the first time Moody's
has assigned ratings to LDPL.
Moody's will remove the provisional status on the ratings upon the successful
completion of the bond issue and upon review of the final documentation.
RATINGS RATIONALE
LDPL's rating is supported by its position as the largest developer
of residential properties in India; the high quality of its projects
under construction, combined with its strong execution capability;
and its track record of delivering high-rise apartments.
The rating is further supported by the company's superior ability
to sell its products, as evident from its performance during the
downturn in the Indian real estate market these last two years.
The rating benefits from the diversity of LDPL's project portfolio
with 49 projects, in multiple phases, contributing to sales
for the next 5 years.
On the other hand, the rating is constrained by LDPL's weak
margins and credit metrics, both of which are expected to improve
as it starts recognizing higher revenues from its current projects and
as the subsequent phases of its Palava City development project attracts
higher prices.
The rating is also constrained by the concentration of most of the company's
projects in the Mumbai Metropolitan Region and its focus on residential
development.
"The rating incorporates our expectation that liquidity will improve
following the proposed bond issuance and that credit metrics will strengthen
over the next two years as key projects reach revenue-recognition
thresholds," says Vikas Halan, Moody's Vice President
and Senior Credit Officer.
LDPL's borrowings have doubled from INR46 billion in FY2012 to INR92
billion in FY2014 (excluding borrowings at London of INR31 billion).
Over the same period, revenue had only increased from INR29 billion
to INR47 billion and EBITDA margins declined from 28.2%
to 22.6%. This has resulted in deterioration in its
credit metrics, such that -- as of the end of FY2014
-- EBITDA/interest was 1.0x and revenue/debt was
52.9% (38.2% including London borrowings).
Such credit metrics are weak for the company's ratings, but
we expect them to improve in FY2017, such that EBITDA/ interest
will surpass 3.0x and revenue/debt (including London debt) will
exceed 80%.
But, as of the end of F20Y14, the company's credit metrics
were weak and margins were low. Its stronger performance over the
last two years has not been yet reflected as LDPL follows a percentage
completion method. Projects are accounted for --
in terms of revenue recognition -- only after the completion
of 30% of their construction.
The revenue recognition will improve from FY17 as more projects become
eligible for revenue recognition. Moody's estimate that,
in FY2017, LDPL will start recognizing sales from 6 additional projects/phases,
including phases for Palava City, The Park, World View and
New Cuff Parade.
As of end-September 2014, reported secured debt to total
assets stood at 37%. The proposed bonds will be subordinated
to the claim of these secured lenders and hence are exposed to structural
subordination risk.
"However, we rate the bonds at par with the company's
CFR as the structural subordination risk is largely mitigated by protection
provided to bondholders under the bond covenants that require the company
to hold land at Palava City -- on an unencumbered basis --
with a value equal to 4x the amount of bonds outstanding during their
tenure," says Halan, who is also the lead analyst for
LDPL. The company will have its landbank independently valued each
year to demonstrate compliance with this covenant.
As of end-September 2014, the value of unencumbered land
at Palava City was at least 10x the expected size of the proposed bonds,
which provides significant buffer for fluctuations in land value and thus
mitigates market risk.
Moody's notes that the market value of the company's assets
is substantially higher than its book value, which are stated at
cost price. The high market value of assets resulted in secured
debt to the market value of asset at only 13% as of end-September
2014.
Moody's would consider notching the bonds from the CFR to reflect
structural subordination, if the protection available to bond holders
deteriorates either because of declines in the market value of the company's
assets or decline in value of unencumbered assets relative to the amount
of unsecured debt.
Indications of such negative pressure on the rating would include secured
debt to the market value of assets rising above 15-20% and
the value of unencumbered assets to unsecured debt declining below 6x.
The stable outlook reflects our expectation that LDPL will substantially
achieve its sales targets; execute its construction plans without
material delays; and stay disciplined in acquisitions for its land
bank in India over the next 2-3 years.
An upgrade over the next two years is unlikely as we expect company's
credit metrics to remain weakly positioned for its rating over this period.
Upward rating pressure could emerge beyond FY2017, if the company
successfully executes its projects, increases its margins and,
at the same time, (a) maintains a reasonable cash balance above
150% of debt maturing for the next 12 months; and (b) maintains
strong financial discipline, such that revenue/debt is above 100%
and EBTIDA/interest is above 4x on a sustained basis.
Downward rating pressure could emerge if (1) the company's liquidity
and operating cash flow generation deteriorate because of weak contracted
sales or aggressive land acquisitions; (2) there is a decline in
prices for its products, slower-than-expected revenue
recognition, or a fall in profit margins, negatively affecting
interest coverage and/or financial flexibility; or (3) the company
engages in material debt-funded acquisitions.
In such a situation, cash and cash equivalents could fall below
100% of debt maturing over the next 12 months, and/or its
credit metrics could deteriorate, such that EBITDA/interest stays
under 3.0x beyond FY2017.
The principal methodology used in this rating was Global Homebuilding
Industry published in March 2009. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
LDPL is the largest real estate developer in India with about 7 million
square feet (INR75 billion) in contracted sales in FY2014. The
company also has the largest land bank in the country, totaling
about 481 msf in saleable area as of September 2014.
LDPL is focused on residential development in the Mumbai Metropolitan
Region with some projects in nearby Pune. More recently,
the company -- along with its promoters -- has expanded
into the London market by acquiring two properties, now in the process
of development. LDPL is privately held by the Lodha family.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vikas Halan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's assigns (P) Ba3 ratings Lodha Developers
