Fitch Ratings-Moscow/London-2 December 2008: Fitch Ratings has today assigned TMM Real Estate Development plc (TMM), operating in Ukraine, Long-term foreign and local currency Issuer Default ratings (IDRs) of 'CC', a National Long-term rating of ‘B(ukr)’, and has simultaneously placed both ratings on Rating Watch Negative (RWN).
The ratings are supported by TMM’s favourable position within the Ukrainian residential property market, the company’s vertical integration comprising development, construction and construction materials businesses, and its substantial project portfolio which is well diversified by quantity (35 projects) and types of project. The main part of the project portfolio is represented by residential projects in which the company has its most expertise.
Negative rating factors include that most of TMM’s projects have yet to start. The company’s ability to build out this project pipeline is heavily reliant on it being able to attract external debt facilities, which Fitch notes could prove to be very challenging in the current financing environment. TMM’s ratings reflect the relatively small scale of the company’s business (net revenues of USD61m, EBITDAR of USD9m at FYE07), its weak liquidity position, lack of rental income and vulnerability to a possible decrease of EBITDAR margin in case of a real estate market downturn. If EBITDAR margin decreased, it could cause a dramatic rise of the net debt to EBITDAR financial ratio. Furthermore, TMM’s corporate governance is below global standards, with a high level of a key-person risk - since the key role in the company’s governance pertains to its major beneficiary and CEO Mr Mykola Tolmachov who controls 70% of its shares. In addition, TMM does not have robust internal policies regulating the level of liquidity, as well as material mechanisms to prevent cash up-streaming to its shareholders.
The RWN reflects Fitch's expectation that TMM is unlikely to be able to repay and to refinance its short-term maturities, given the company’s weak liquidity position, the impact of a possible real estate market downturn, and the challenging financing environment. Therefore, the company is strongly reliant on the decisions of its lenders to extend the maturities, and Fitch cannot safely assume that all lenders may be willing to grant an extension. A downgrade of the ratings could be triggered by either TMM’s actual failure to repay its debt maturities, or evidence of imminence of default. Conversely, Fitch notes that the RWN could be resolved if the company creates liquidity reserves sufficient to cover its short-term debt maturities.
TMM’s liquidity is supported by cash reserves of USD1m and committed un-drawn credit facilities totalling USD25m (as at 20 November 2008). At the same time, the company’s funding needs comprise short-term debt of USD65m and it continues to generate negative free cash flow. Therefore, TMM has a weak liquidity score of below 0.5x. As at 20 November 2008 the company’s total debt is USD88m, of which 66% is secured (mainly with real estate assets). No financial covenants are present in the loan documentation. All the debt is concentrated at TMM’s Ukrainian-based 100% subsidiary Firma TMM – LLC, which is the main operating company of TMM group specialising in construction and development. The loan portfolio includes the domestic bond issue of UAH181m (equivalent of USD30m) with a coupon of 16.5% due October 2009.
TMM is incorporated in Cyprus. It is a holding company of a vertically integrated development and construction group operating in Ukraine - mainly in Kiev, with presence in Kharkov and Crimea. In FY07 TMM’s net revenues made up USD61m, EBITDAR was USD9m, EBITDAR margin 15%. The revenue was provided by sales of apartments (45%), construction (48%), rentals (2%) and other activities (5%). In 2007 the company IPO’d at the Deutsche Stock Exchange. Free float is 13%.