"The change in outlook to negative reflects the weakening in Lodha's liquidity profile, because of lower-than-expected operating sales and delays in the execution of its planned asset sales, both in London and India," Saranga Ranasinghe, assistant vice-president and analyst at Moody’s said.
Ranasinghe said that while Lodha has assets that it could sell to improve its liquidity position, uncertainty prevails over the company’s ability to execute these asset sales in a timely manner and at values that would be sufficient to address the liquidity needs.
Lodha plans to repay £290 million (Rs 2,600 crore) from sales at the 48CS project in London for which it had taken the loan. Lodha has extended the repayment of this facility to December 2019 from August 2019. Moody’s said that at the end of April 2019, sales at the project were £260 million, covering 90 per cent of the facility.
Besides, Lodha has $324 million (Rs 2,235 crore) in bonds maturing in March 2020 and £517 million (Rs 4,653 crore) maturing in March 2021.
Lodha also has Rs 2,200 crore of Indian debt maturing over the next 15 months.
Though rating firm Fitch has also endorsed that Lodha could cover the London property loan through project sales and Indian debt can be refinanced in light of Lodha's large inventory and land bank, it believes addressing the remaining maturities will require alternative funding sources, like asset sales and inventory financing.
“A failure to execute its refinancing plan may result in the rating being downgraded by one or more notches,” Fitch said.
When contacted, a spokesperson for Lodha said that there was no rating downgrade for Lodha – only the rating outlook has been changed.
“ Over the last 6 months, rating agencies have carried out such outlook changes for hundreds of companies
and we are not the only one. Lodha has exceptional performance in 2018-19, generating over Rs. 9000 crores of cashflow – which is equivalent to the next 10 developers in MMR combined. Further, we delivered over 10,000 units to our customers with four out of every five units delivered before time,” the spokesperson said.
The spokesperson said that there is not a single instance of any delay in servicing of interest by Lodha. “The outlook change is on account of delay in completion of our asset sale in London which we expect to happen by September and have several alternatives developed for the same. As India’s largest developer, we look forward to continuing to create world-class communities with offices, homes and social infrastructure and contributing to nation’s development.”the spokesperson said.
A banker to Lodha said the developer has a couple of fall back options to repay its debt in case the asset sale faces any challenges. The banker however did not disclosed the options Lodha have,but Moody’s expects the company to generate about $250 million from the sale of a commercial building in the New Cuffe Parade project and a retail mall in Palava, which would provide around $130 million after retiring debt of around $120 million.
In December 2018, Lodha had raised Rs 500 crore for Phase II of the Palava project from Palava Ivanhoe Cambridge Residential Fund 1 and sold five floors in a commercial building in New Cuffe Parade to Trent for Rs 300 crore.
Lodha had to sell the assets due to falling sales and cash flows. Its total debt for the nine months ended FY19 stood at Rs 24,950 crore, up 6.7 per cent from Rs 23,380 crore in FY18, according to India Ratings & Research.
Operating sales in Lodha’s Mumbai and London projects were weaker by 20 per cent and 50 per cent, respectively, compared to Moody's expectations for the nine months to December 2018.
Lodha’s liquidity challenges are also partly due to its move to defer its initial public issue, which would have reduced its debt by Rs 4,500 crore.
While Brexit-related uncertainties are said to be a reason for its weak sales in London, back home it is battling slow sales due to change in GST rates and oversupply in some of the markets in Mumbai.
“In the last six months, there was no sale and no collection because nobody wanted to pay 12 per cent GST as the government announced new rates from April 1 this year,” said Amit Goenka, managing director & CEO at Nisus Finance, a Mumbai-based fund manager.
Goenka said the liquidity crunch faced by non-banking financial companies
(NBFCs) and housing finance companies
(HFCs) also hit developers badly. HFCs and NBFCs together account for 60 per cent of loans to developers, which have been fighting liquidity challenges since the ILF&S defaults in August last year.
Oversupply has also hit its sales, say rival developers. “In south Mumbai where Lodha has key projects such as the World Towers, there is a supply of 20 million square feet of projects by the likes of Runwal, Raheja and so on,” said a property developer. He said most of the firms built large, expensive apartments which are hard to sell in the current market.
Another Mumbai developer said high leverage has to be supported by high velocity of sales. “Today, markets are down 50 per cent and sales are not supporting large repayments,” he said, adding that if Lodha defaults, all developers will come under pressure in the country.