Fitch Ratings-London-05 October 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. Based on Fitch forecasts, TMM may not generate sufficient operational cash flow in 2009-2011 to cover its interest costs.
Fitch forecasts a negative free cash flow of about USD13m for TMM over the next 12 months. Given the company’s low levels of back-up liquidity (approximately USD300,000 of cash and zero committed undrawn credit facilities), there is concern over how the company will be able to finance this shortfall. Fitch understands from TMM that it is currently in talks with various investors with a view to raising new finance, although the agency remains sceptical about its ability to access new finance given its small size, weak profile and exposure to a depressed real estate market.
Nevertheless, Fitch positively notes the progress TMM has made to date with resolving its short-term debt problem. Since November 2008, the company has managed to refinance all of its USD65m of short-term debt, including UAH150m (USD18.7m equivalent) of bonds that matured on 1 October 2009. As a result, TMM now has no major debt maturities until May 2011 (when a USD18m equivalent revolving credit facility matures). A large part of this refinancing has come from JSC State Savings Bank of Ukraine (Oschadbank) (rated ‘B’/Negative Outlook), a state-owned Ukrainian bank, which has provided UAH310m (USD37m) of new debt since February. Fitch views the willingness of a state entity to lend to TMM as a positive indicator of the company’s ability to access local financing.
Fitch further notes that TMM’s core market, the Ukrainian residential property market, has suffered a significant fall in demand following the country’s macroeconomic turmoil. TMM has indicated that its sales may have fallen by approximately 45% yoy in H109 in Hryvnia (UAH) terms, versus 47% for the whole construction market (source: State Statistics Committee). Sales in USD terms - TMM’s reporting currency - will likely be even lower given the depreciation of the UAH over the last 12 months. Although there have been some tentative signs of stabilising prices in the Kiev market (in UAH terms), the market remains over-supplied, and Fitch does not expect a significant improvement in market conditions for the foreseeable future given the weak wider Ukrainian economy and the lack of availability of mortgage and development finance.
Fitch now expects to resolve the RWN by end-December 2009. A downgrade of the ratings could be triggered if a default, such as a failure to cover scheduled interest payments, appears imminent or inevitable. Conversely, the ratings could be affirmed at current levels if the company creates sufficient liquidity reserves to cover its forecast negative free cash flow over at least the next 12 months. A removal of the RWN status also remains 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 USD81m, all of which is secured.