Fitch Ratings-London-17 June 2009: Fitch Ratings is maintaining Ukraine-based TMM Real Estate Development plc’s (TMM) Long-term foreign and local currency Issuer Default ratings (IDRs) of 'CC' and National Long-term rating of ‘B(ukr)’ on Rating Watch Negative (RWN). The ratings were originally placed on RWN on 2 December 2008. The RWN continues to reflect acute concerns about TMM’s weak liquidity and the poor conditions currently prevailing in the Ukrainian residential property market.
TMM’s liquidity continues to be constrained by a lack of back-up liquidity (approximately USD27m of cash and committed undrawn credit facilities at end-May 2009) relative to its short term debt maturities of USD24m and Fitch forecasted negative free cash flow of about USD44m over the next 12 months. This leaves TMM with a liquidity score (sources of liquidity relative to uses of liquidity over the next 12 months) of only 0.4x, indicating that the company may be unable to repay or refinance its upcoming debt obligations. The difficult financing environment and the ongoing downturn in the Ukrainian residential market will continue to compound these problems.
Nevertheless, TMM has made some progress towards improving its liquidity over the past six months, most notably obtaining a UAH310m (USD39m) credit facility in February 2009 with JSC State Savings Bank of Ukraine (Oschadbank) (rated ‘B’/Negative Outlook), a state- owned Ukrainian bank. Proceeds from this loan may be sufficient to allow TMM to meet its debt maturities in 2009 (UAH185m, or USD24m equivalent). Fitch views the willingness of a state entity to lend to TMM as a mildly positive indicator of the company’s ability to access local financing.
However, the majority of these loan proceeds have yet to be received by TMM, with payments scheduled to be staggered across Q209 and Q309. Given Oschadbank’s weak credit rating and the fragile Ukrainian banking environment, there remains a risk that TMM will not receive all of the promised funds, which in turn would make it difficult for the company to repay its 2009 maturities.
Even if the Oschadbank funds are received as planned, Fitch remains cautious about TMM’s ability to meet its 2009 maturities as continued weak market conditions could lead to significant negative operating cash flows. Management had indicated that sales to April 2009 are 45% below 2008 levels in Hryvnia terms (and thus even lower in USD terms given the Hryvnia’s depreciation), which will weaken cash flows.
Fitch now expects to resolve the RWN by end-September 2009. A downgrade of the ratings could be triggered by either TMM's actual failure to repay its debt maturities, or evidence of an imminent default. A failure to receive funds from Oschadbank as expected by late-September would also lead to a downgrade. Conversely, the ratings could be affirmed at current levels if the company creates sufficient liquidity reserves to cover its short-term debt maturities and forecast negative free cash flow over at least the next 12 months. A removal of the RWN status would also be contingent on receipt of TMM’s audited 2008 annual accounts, which have yet to be published.
TMM, incorporated in Cyprus, is the 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 had revenues of USD61m and EBITDAR of USD9m. As at 31 May 2008, TMM had total debt of approximately USD81.6m, of which 71% was secured (mainly with real estate assets). The loan portfolio includes a domestic bond issue of UAH181m (equivalent of USD23m) due October 2009.