Moody’s upgrades Macrotech Developers’ to B3 on debt reduction, sales improvement

Moody’s upgrades Macrotech Developers’ to B3 on debt reduction, sales improvement

Ratings agency Moody’s Investors Service has upgraded the corporate family rating (CFR) of Macrotech Developers Limited (MDL) and the backed senior secured rating of Lodha Developers International’s USD bonds that are guaranteed by MDL to B3 from Caa1.

The outlook on the ratings is positive.

“The upgrade of MDL’s ratings to B3 from Caa1 reflects an improvement in the company’s credit profile as a result of debt reduction measures by the management, as well as a strong recovery in the company’s operating performance both at India and London following the easing of pandemic-related restrictions,” said Sweta Patodia, a Moody’s Analyst.

According to her, the positive outlook reflects the view that MDL’s credit profile could improve further once the company raises additional equity that strengthens its liquidity, as well as refinances over the next few months on its USD-denominated bonds due in March 2023.

Moody’s estimates that MDL’s gross consolidated borrowings, including debt at London, have reduced to around Rs 18,800 crore as of September end from Rs 22,300 crore as of March end. This has been driven largely by proceeds from an initial public offering (IPO) completed in April and repayment of a loan by the promoter in June.

At the same time, MDL’s operating performance has recovered strongly following the easing of pandemic related restrictions. The company achieved operating sales of Rs 2,000 crore for the second quarter ended September, at its Indian operations, compared with Rs 1,000 crore in the immediately preceding quarter.

The recovery in operating sales was despite the second quarter being seasonally weak because of the monsoon season in India, when construction activity slows down. The improving pace of vaccinations and a ramp-up in economic activity have improved consumer sentiment in India. At the same time, the pandemic has resulted in structural changes in consumer preferences for bigger homes.

Moody’s expects that these factors, combined, will keep operating sales strong over the next 12-18 months. It estimates MDL’s operating sales will be around Rs 8,000 crore at its Indian operations for the fiscal year ending March 2022.

The company’s operating performance at London has also improved following the UK’s re-opening. In September, MDL achieved operating sales of 110 million pounds at Grosvenor Square, one of its projects in London.

Moody’s expects that sales momentum at Grosvenor Square will remain buoyant given the gradual resumption in international travel and re-opening of UK’s borders for international tourists.

MDL will use proceeds from sales of up to December 2021 to partially repay the existing inventory finance at Grosvenor Square. The company plans to enter a new inventory finance facility to be secured against the unsold inventory at the project, which Moody’s estimates will be around 450 million pounds by December 2021.

Proceeds from this inventory facility will be used to settle outstanding dues under the current facility and refinance the outstanding bond. This will alleviate refinancing risks relating to the USD-denominated bonds maturing in March 2023, Moddy’s added.

Sales performance at Lincoln Square also remains buoyant with 61 million pounds of sales in the first half of fiscal 2022. With just 59 million pounds of unsold inventory, Moody’s expects the project to be fully sold within fiscal 2022.

Moody’s also expects that proceeds from existing sales will be used to repay the existing inventory loan of around 33 million pounds. MDL will likely transfer the surplus proceeds to India after meeting the interest expense on the USD bond and the loan facility at London.

In addition, the company plans to raise up to Rs 4,000 crore of equity over the next twelve months which will strengthen the company’s liquidity. Board approvals for raising equity are in place.

In terms of environmental, social and governance (ESG) factors, MDL is exposed to the effects of the pandemic on the operating environment in India. Moody’s considers this to be 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 88.5% of the company. 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 and slow down the likely deleveraging.

However, Moody’s expects the risk around concentrated ownership to moderate as the company is planning to raise further equity over the next twelve months.

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