Moody’s Investors Service Affirms Macrotech Developers’ Caa1 Rating, Changes Outlook To Positive

Moody’s Investors Service has affirmed Macrotech Developers Ltd’s (MDL’s) Caa1 corporate family rating and the Caa1 backed senior secured rating of Lodha Developers International Ltd’s USD bonds guaranteed by MDL. The outlook on the ratings has been changed to positive from stable. The rating action follows completion of MDL’s initial public offering (IPO) and successful listing on the Indian stock exchanges on April 19.

“The affirmation of MDL’s Caa1 ratings and change in outlook to positive reflects our view that proceeds from the recently concluded IPO and other management initiatives can eventually improve MDL’s liquidity, which could then support a higher rating despite pandemic-related operating challenges,” said Sweta Patodia, a Moody’s Analyst.

“Successful completion of the IPO has broadened funding base for the company. The IPO and conclusion of the inventory financing at Grosvenor Square in London during November last year also demonstrate MDL’s improved financial management,” she said.

MDL raised around Rs 2,400 crore from its recent equity offering of which almost 80 per cent of the proceeds will be applied towards debt reduction. The management is currently in the process of identifying specific tranches of debt that will be repaid from the IPO proceeds.

MDL expects to receive around Rs 1,500 crore by way of repayment of loans made to the promoter over the next three to six months. The company expects to receive another 150 million to 250 million dollars as proceeds from land sales and monetization of commercial assets by March 2022. The management intends to use most of these proceeds towards debt reduction.

As of March 31, MDL had around Rs 6,000 crore of debt maturities at its India operations over the next 24 months. MDL’s liquidity could improve significantly following the completion of these transactions even if its operating performance were to weaken.

MDL also has around 45 million pounds (60 million dollars ) of debt maturing at Lincoln Square in London by March 2022. The company intends to service this debt out of fresh sales made at the project. As of March 31, the company had 121 million pounds of unsold inventory at the project.

Moody’s said remote working, low interest rates and government tax incentives will keep housing demand in India buoyant over the next 12 to 18 months. This trend bodes well for real-estate developers such as MDL.

A virus resurgence in India, especially in MDL’s main operating market Maharashtra, has led to fresh lockdowns in the region. This could affect the company’s operating sales and collections over the next few months. MDL’s operating performance in London also continues to be subdued because of pandemic-related disruptions.

In terms of environmental, social and governance (ESG) factors, MDL is exposed to effects of the pandemic on the operating environment in India. Moody’s considers this as a social risk. In terms of the governance risk, Moody’s expects MDL to remain exposed to risks from concentrated ownership as the promoter group continues to hold 88 per cent of the company after the IPO. In addition, the company’s dividend policy might change following its public listing.

Payment of dividends if substantial will reduce MDL’s free cash flows which remain exposed to the deteriorating operating environment in India. Nonetheless, Moody’s said that MDL’s financial disclosures will improve because the company will now have to comply with the disclosure requirements as per listing regulations in India.