Lodha’s Tap Issue To Ease Onshore Refinancing Risk

Singapore/Mumbai: India-based homebuilder Lodha Developers Private Limited's proposed tap issue of its 12% senior unsecured US dollar notes due in 2020 will lower its near-term onshore refinancing requirements, as the company plans to use the proceeds to repay intra-group debt due from its London projects to its Indian operations. This will in turn repay its onshore bank debt, Fitch Ratings says.

The agency also says the tap issue will not affect Lodha's 'B' Long-Term Issuer Default rating (IDR) with Stable Outlook or the 'B' long-term rating and 'RR4' Recovery Rating on its outstanding senior unsecured US dollar notes, which are issued by its 100% subsidiary, Lodha Developers International Limited, and guaranteed by Lodha and certain subsidiaries.

The proposed tap issue and the company's existing US dollar notes are rated at the same level as Lodha's Long-Term IDR, as they represent its direct, unconditional, unsecured and unsubordinated obligations.

Lodha reported robust property presales of INR36.6 billion and cash collections of INR44.7 billion for the six months ending-September 2017 (1HFY18). This is broadly in line with our expectations of around INR70 billion in presales and INR77 billion in cash collection for FY18, up from INR69.2 billion and INR76 billion, respectively, in FY17. The pace of the company's collections has increased due to a number of large projects being completed. Lodha's strong sales are partly driven by the Palava project in Maharashtra, which benefits from the Indian government's push to provide affordable housing through tax and interest-cost incentives for buyers.

We expect Lodha's leverage to remain steady, at around 70% in the next two years, supported by its strong domestic performance. Fitch estimates that Lodha's consolidated leverage, defined as net adjusted debt/adjusted inventory, would have dropped to 72% on a pro forma basis as of FYE17 if its London projects were amalgamated, from 80% without the amalgamation.

Lodha had approved and undrawn onshore credit lines of INR20 billion at 1HFY18, compared with INR30 billion of onshore debt falling due in the next 12 months. Of this INR30 billion debt, INR11.5 billion consists of short-term on demand facilities that are likely to be rolled over during the normal course of business, leaving INR18.5 billion of term debt maturing in the same period. The company also has more than INR60 billion of completed inventory for which it has received occupancy certificates from local authorities, part of which is unencumbered and can be pledged for incremental financing if required.

We expect Lodha to generate negative free cash flow in FY18, for which we believe the company to be able to secure financing given its business risk profile as one of India's leading homebuilders.