Fitch: Russia/Ukraine RE liquidity extremely weak
Construction & property sector has the weakest liquidity position
Fitch Ratings says the Russian and Ukrainian construction & property (RUCP) sector has the weakest liquidity position of all corporate sectors covered by the agency in EMEA, Dow Jones Newswires reported. The liquidity position of many RUCP companies worsened over 2008 and Q109 as end markets rapidly weakened and bank financing withdrew from the system. This is a key conclusion of a report published today entitled `Liquidity Focus: Russia/Ukraine Construction and Property`.
"Liquidity is not likely to improve until regional real estate markets reach a new price equilibrium, sustainable operational cash flow generation returns, and debt capital markets re-open for issuers in the Russian/Ukrainian real estate sector," says Julian Crush, Senior Director in Fitch`s EMEA Construction & Property team. "In the interim, Fitch expects to see is a series of high profile debt restructurings in this sector, the outcomes of which remain uncertain."
There are no long-term public bonds in the capital structures of Fitch-rated RUCP issuers. As a result of this, the sector`s refinancing risk is likely to remain high for several years with the dominance of short-term domestic bank debt in corporate funding structures, weak operating cash flows, the withdrawal of foreign bank capital, and the low probability of success for any attempts to raise enough new equity to make any real positive impact on liquidity. The aggregate total short-term debt of Fitch`s rated universe of RUCP issuers is approximately USD1.5bn equivalent, accounting for 45% of total gross debt of USD3.3bn - in a weak market context, this level represents significant credit risk.
Across Fitch`s universe of RUCP issuers, balance sheet cash is low, committed undrawn facilities are largely absent (committed undrawn facilities/short-term debt at only 15%, compared with 234% for UK property investment companies) and, in all cases, these issuers are free cash flow negative. In summary, the total sources of liquidity available to meet upcoming debt maturities are highly constrained and hence default risk is significantly heightened, as reflected in Fitch`s ratings.
Fitch`s entire rated universe in this sector falls into the `weak` categorisation of relative liquidity analysis. Liquidity scores (sources of liquidity to uses of liquidity over a 12 month period) are less than 1x (ranging from 0.03x to 0.7x), indicating an unhealthy reliance on the decisions of domestic and international banks to extend loan maturities and/or provide new financing to deal with upcoming debt maturities.
Since September 2008, Fitch has undertaken nine separate rating actions in this sector where worsening liquidity has been a contributory factor. Current rated coverage includes JSC Sistema-Hals (`B`, Rating Watch Evolving), OJSC LSR Group (`B-`, Rating Watch Negative), TMM Real Estate Development plc (`CC` Rating Watch Negative) and Mirax Group Holding BV (`C`, Rating Watch Negative)