The proposed bond issue by Macrotech Developers (MDL), earlier known as Lodha Developers, may alleviate its near-term debt problems. However, significant debt maturities and unfavourable industry conditions will keep its refinancing risk high and liquidity weak, said a report by Moody’s Investor’s Service.
“The proposed bond transaction is subject to significant execution and market risk, including the fulfillment of a condition precedent. This will create uncertainty around MDL’s ability to complete the bond transaction as planned,” said Sweta Patodia, a Moody’s analyst.
To proceed with its proposed bond, Macrotech will first have to raise about $118 million and deposit the proceeds in an escrow account, which is a condition precedent.
Failure to do so will prevent the company from progressing with the proposed bond and may lead to a default on the existing bonds maturing on March 13.
This is because Macrotech does not have alternative financing arrangements to repay the bond. Even if MDL is able to fulfill the conditions precedent, bond execution remains subject to market conditions, Moody’s said.
Macrotech needs to repay $343 million as principal and interest on its dollar bond maturing on March 13. Around $118 million of that amount relies on proceeds from an inventory financing facility, the transfer of funds from its Indian operations and collections from existing sales, it said.
The latter, in particular, also remains subject to market conditions. Any delays in receiving such proceeds will prevent the bond transaction from progressing, increasing the likelihood of default. MDL does not have alternative financing arrangements in place to repay the maturing bond, said Moody’s.
“Nevertheless, if Macrotech is successful in the issuance, near-term liquidity risk will ease, but refinancing risk will remain significant. An additional $1 billion debt will be maturing by March 2021 amid an overall weak operating environment,” added Patodia.
Tepid consumer confidence, slowing economic growth and tight liquidity have hurt real estate demand in the Mumbai Metropolitan Region – Macrotech 's key operating market. Project launches have consequently continued to exceed sales, leading to inventory build-up and price corrections. These subdued market conditions will likely continue to constrain Macrotech’s earnings over the next 12 months, Moody’s said.
As such, even if MDL addresses the upcoming bond maturity, Moody's sees limited upside for the rating over the next 12-18 months. In addition to significant refinancing risk, weak financial management, as reflected by its inability to execute refinancing plans on a timely basis, will continue to weigh on Macrotech’s credit quality.