Detailed Rationale

CRISIL Ratings has reaffirmed its 'Provisional CRISIL AA(CE)/Stable’ rating of the commercial mortgage-backed securities (CMBS; issued as non-convertible debentures [NCDs]) of Avalor Developers Private Limited (Avalor) and extended its validity.

 

The rating continues to reflect the benefits of the structural features of the instrument, quality of the underlying property, healthy occupancy, good tenant profile, comfortable loan-to-value (LTV) ratio and debt service coverage ratio (DSCR), and strong track record of the promoter group in developing and operating retail malls. These strengths are partially offset by exposure to refinancing risk and high number of lease renewals over the medium term.

 

The CMBS debt is being raised by Avalor, which is a fully owned subsidiary of Runwal Developers Pvt Ltd (RDPL). Runwal Mall Developers Pvt Ltd (RMDPL) is the operating company that houses R City Mall, Ghatkopar, and is 50% owned by Avalor and 50% by RDPL.

 

As per the details provided to CRISIL Ratings at the time of assigning the rating on March 27, 2023, the CMBS debt, backed by 100% lease rentals of RMDPL, was to be utilized by Avalor for purchase of 50% stake in RMDPL from GIC and balance for General Corporate Purpose after DSRA creation.

 

However, in order to meet the timelines committed to GIC for its exit, Avalor raised funds though commercial papers and availed debt from NBFC to provide GIC an exit, as finalization of documents pertaining to the CMBS transaction took time. Therefore, the use of proceeds for the proposed CMBS debt would now be to repay the LRD debt raised by RMDPL which was availed to repay the outstanding debt at Avalor.

 

Additionally, the management has communicated to CRISIL Ratings that certain terms and covenants of the CMBS are currently under deliberation and are expected to be revised. The updated term sheet is expected to be shared with CRISIL within a month’s time. Any significant changes to the terms of the current CMBS structure will be a key rating sensitivity factor.

 

CRISIL Ratings has factored in the advantageous location of the property, its low vacancy and proficient operational management. These enable stability of rental revenue and diversity in tenant profile. The mall enjoys a strong market position as it is strategically located and well connected to various parts of the city. Footfall was above 75 lakh and occupancy more than 95% in fiscal 2023, supported by more than nine family entertainment zones and over 300 annual events. Also, the mall has a successful track record of renewing 80-90% of leases and churn is only 10-20%. It houses a diverse set of tenants, with anchor tenants forming about 50% of the total revenue and ~60% of the total area. The top five tenants occupy ~30% of the leased area and contribute to ~30% revenue. Driven by strong fundamentals, lease rental revenue for fiscal 2023 up by ~70% on year and is expected to improve with renewal of rental lease at higher rate per sq ft.

 

The rating also takes into account benefits of the structural features of the proposed CMBS, such as NCD secured by a mortgage over R City Mall and an exclusive charge on its rental income, presence of a debt service reserve account (DSRA), escrow mechanism with defined apportioning of receivables and priority for debt servicing, along with multiple call options at various maturities with cash trapping trigger mechanism providing a flexible schedule for amortisation of principal but ensuring partial repayment (10-12%) of the principal by the end of five years. The rating also factors in presence of additional three-year tail period to repay the balance debenture amount along with a separate Put option mechanism for enforcement of security during the tenure of the NCD to provide repayment to NCD holders without default on the issuer, and compulsory trapping of all surplus during the period.

 

Timely receipt of monthly lease rentals from a large portfolio of tenants, ability to refinance the balance debentures before the sixtieth month from the date of issuance of NCDs and non-adherence to the payment mechanism will be key rating sensitivity factors.

In terms of structure of the transaction, the NCD has a tenure of 96 months and the principal is redeemable by the end of the ninety-sixth month from the date of allotment. During this period,

 

Avalor shall service interest on the outstanding debentures. Default will be recognised only in case the interest is not serviced in a timely manner during the tenure of the NCD and if the principal amount is not redeemed. The put option provider, a third party entity, dishonouring the Put option at the end of the sixtieth month from the date of allotment will not be construed as a default on the issuer or the instrument.

 

The monthly interest payments on the NCDs will be paid from the lease rentals. Principal repayment will be back-ended with partial quarterly redemptions starting after two years from the date of allotment and equivalent to 35% of the monthly excess cash available after meeting the interest obligation. The major principal repayment will be at the maturity of the NCDs.

 

A comfortable DSCR of ~1.6 times mitigates risks of decline in lease income and increase in operating expenses. Even in case of stress, if the vacancy is at 50%, monthly cash flow will be sufficient to make scheduled interest payments to NCD investors. Additionally, a DSRA equivalent to three months of interest obligation is available to meet shortfalls in monthly interest payments and CRISIL believes that a LTV ratio below 45% at the time of maturity of the NCD is comfortable for the CMBS transaction.

 

Avalor shall not avail any further external borrowing during the tenure of these debentures except unsecured, subordinated debt from its promoter and/or group companies controlled by the promoters, either directly or indirectly, which shall be payable only after discharge of all the obligations of the issuer, in respect of these debentures or with prior consent of Debenture Trustee, which shall be only for the purpose of refinancing the outstanding NCDs. The restriction in additional issuance of debt along with experience of the promoters, stability of cash flow generated from the property, and restricted capex will help Avalor refinance the NCDs by the end of the indicative maturity date.

 

In case the issuer is unable to refinance the NCDs by the indicative maturity date, structural features empower the debenture trustee to repay investors by selling the underlying properties or pledged shares by the legal final maturity date. Tail period of three years between indicative and legal final maturity date has been provided to enable the trustee to exercise the structural features. The trustee has been bestowed with the right to enforce the mortgage in case the Put option provider, a third party entity,  fails to honor its obligation, following rights to ensure principal repayment by the legal final maturity date. CRISIL Ratings believes the rights provided to the debenture trustee and the tail period are adequate to realise funds and repay the investors.

 

These features allow the rating on the CMBS issuance to be delinked from the parent’s credit risk profile. The validity and enforceability of the transaction structure and other key legal aspects have been opined by an independent legal counsel, namely, Cyril Amarchand Mangaldas.

 

However, the rental revenue of the mall remains susceptible to factors such as consumer spending, macroeconomic conditions and sudden exit of large/multiple clients. The lease agreements are based on fixed rent, minimum guarantee and revenue-sharing basis. Retail sales are driven by festive seasons, promotions and discounts, which result in sales volatility for the tenants and consequently in rental income. CRISIL Ratings believes increase in competition resulting in reduced lease rental renewals or sustained slowdown in economic activity causing the exit of tenants and consequently higher vacancy may impact rental revenue at the mall.

Analytical Approach

CRISIL Ratings has applied its criteria for rating commercial mortgage-backed securities. The suffix CE reflects the debenture trustee monitored payment structure that is designed to ensure full and timely payments to CMBS holders.

Key Rating Drivers & Detailed Description

Strengths:

Credit enhancement owing to salient features of the proposed CMBS 

The company benefits from the credit enhancement on account of the features of proposed CMBS which include debenture trustee monitored payment mechanism for debt servicing, put/call option and enforcement of security.

 

The proposed CMBS structure allows flexible quarterly amortisation of debt starting two years from the date of allotment of NCDs and equivalent to 35% of the monthly excess cash available after meeting the interest obligation till the indicative maturity date. The escrow bank will receive a notice from the debenture trustee seven days prior to the interest payment date and in case of inadequate funds, money from the DSRA account will be utilised. For quarterly payments, an interim Call option will need to be exercised through a notice to be issued 21 days prior to the quarterly debt servicing date. The redemption will be to the extent of funds available in the redemption account as on the day of issuance of such notice.

 

The debt instrument will have two key dates: an indicative maturity date, which will be five years from the date of allotment of the NCDs, and a legal final maturity date, which will be eight years from the date of allotment of the NCDs. In between 4-5 years from the date of allotment of the NCD, the issuer, Avalor has the right to exercise the Call option and repay the NCDs. Failure to repay after exercising the call option shall trigger an event of default by Avalor.

 

If the Call option has not been exercised, the debenture trustee will send a notice to the Put option provider within five days from the start of the tail period, to exercise the Put option. If the NCD is not redeemed, the Put option provider, a third party entity, a separate entity, will have the right to enforce the mortgage of the security or sale of the pledged shares to repay the NCD holders. If the NCD amount is not redeemed within the tail period, that is eight years from the date of allotment of the NCD, it will trigger an event of default. However, CRISIL Ratings believes the rights provided to the debenture trustee and the tail period are adequate to realise funds and repay the investors.

 

Steady cash flow from lease rentals, backed by strong and diversified tenant profile 

R-City Mall, launched in 2009, is one of the largest malls in the city with gross leasable area of 12.14 lakh sq ft, and high occupancy rates, with more than 300 retailers.  The mall is strategically located in Ghatkopar with no other A-grade mall in its vicinity and is well connected to various parts of the city through metro, express highway and freeway. The mall boasts of high footfalls, above 75 lakh in fiscal 2023, and gradually inching up to pre-Covid levels. High footfalls are backed by 2.5 lakh sq ft of entertainment zones and over 300 events organized in a year, which support occupancy.

 

R City Mall houses a diverse set of tenants, with anchor tenants accounting for about 50% of the total revenue and ~60% of the total area. Tenant concentration is moderate with the top five tenants occupying around 30% area and contributing to 30% of minimum guaranteed rentals, with a weighted average lease expiry of three years.

 

Comfortable DSCR and structured prepayment during the tenure of the NCDs

Average DSCR is expected at 1.6 times from fiscal 2024 to 2028. There is 35% cash sweep for repayment from excess cash every quarter after two years of allotment. Additionally, lease rentals will be deposited in a designated escrow account and will be utilised as per waterfall mechanism which prioritises statutory payments and debt obligations.

 

Tail period of three years allows sufficient time for refinancing the debt or sale of property. Also, CRISIL believes that a LTV ratio below 45% at the time of maturity of the NCD is comfortable for the CMBS transaction.

 

Strong experience of the promoter in the real estate industry

The Runwal group has experience of more than four decades in the residential, commercial, and organised retail verticals. It has track record of delivering over 50 projects of ~14 million sq ft (msf). It operates in the luxury, premium and large-format township categories in residential development. The group will continue to focus on residential real estate, with ~10 msf expected to be launched and scaled up to 15-20 msf over the next 2-3 years.

 

The group also owns and manages the largest retail mall chain in Mumbai with over 2 msf of gross leasable area, which will expand to 5.5 msf over the medium term. It has more than 13 years of experience in managing retail operations.

 

It has a conservative financial policy, leading to low debt outstanding for its projects and sufficient cash inflow. Debt has increased marginally following the LRD debt raised by RMDPL, which will be refinanced by the CMBS debt, with external debt to total assets expected to remain around 30% over the medium term.

 

Weaknesses:

Exposure to refinance risks

The transaction structure requires the issuer to pay monthly interest on the NCDs along with 35% cash sweep for repayment from excess cash every quarter after two years from the date of allotment. However, the debenture holders are exposed to refinancing risk owing to the outstanding NCDs at the end of the indicative maturity. The risk is mitigated because of inclusion of a three-year tail period wherein the debenture trustee is empowered to repay investors by selling the underlying properties or pledged shares by the legal final maturity date.

 

Large number of leases coming up for renewal

Almost 20% of the leased area is due for renewal in the next 12 months and another 20% in the year after. Lock-in period for all these contracts have expired. However, for almost 50% of the rental leases coming up for renewal, current rentals are less than the average rentals, and hence, renewal of the leases is not expected to pose a major challenge and will aid in improving the rental income of R City Mall. Additionally, of the tenants having rentals lesser than average rental, 70% are anchor tenants and 10% are mini anchor tenants, thereby providing safety in renewal of contacts even at higher rates. The mall also has a successful track record of leasing out this property, with occupancy remaining above 90% in the past five years. Nevertheless, CRISIL Ratings believes that renewal of leases poses some degree of risk to the cashflows in near to medium term.

Liquidity: Strong

The average DSCR is expected to remain comfortably at 1.6 times over the tenure of the debt and Debt Servise Reserve Account (DSRA) equivalent of 3 month interest payment will be created during the tenor of the NCD.

Outlook: Stable

CRISIL Ratings believes the mall will maintain low vacancy and steady lease rentals over the medium term because of its advantageous location and proficient operations.

Rating Sensitivity Factors

Upward Factors:

• Occupancy at 95% or above on sustained basis along with increased rentals leading to improvement in DSCR to 1.8-2 times
• Material appreciation in property value and/or reduction in debt leading to LTV ratio improving to below 35% 

 

Downward Factors:

• Occupancy below 90% on sustained basis or material reduction in rental income weakening the debt protection metrics
• Material decline in property value and/or increase in debt leading to LTV ratio of 60% or above 

 

About CMBS

The CMBS debt is being raised by Avalor, which is a fully owned subsidiary of Runwal Developers Pvt Ltd (RDPL). Runwal Mall Developers Pvt Ltd (RMDPL) is the operating company that houses R City Mall, Ghatkopar, and is 50% owned by Avalor and 50% by RDPL. The proposed CMBS debt, to be backed by 100% lease rentals of RMDPL, will be utilized to repay outstanding debt of RMDPL and for General Corporate Purpose.

 

The net lease rentals from R-City Mall, will be used for monthly servicing of debt and quarterly servicing of debt after 2 years from date of allotment. Only 35% of excess cash that will be generated will be used for quarterly repayment.

 

The debt instrument will have 2 key dates. The indicative maturity date will be 5 years from the date of allotment of NCD, and the legal final maturity date will be 8 years from the date of allotment of NCD.

 

From 4th yr to 5th year from the date of allotment of NCD, the issuer has the right to exercise call option and repay the NCD. Failure to repay after exercising the call option shall trigger a default.

 

If the call option has not been exercised, the DT will send a notice to put option provider, a third party entity, within 5 days from the start of the tail period, to exercise the put option. If the NCD is not redeemed, the put option provider, a separate entity, will have the right to enforce the sale of mortgage or sale of the pledged shares to repay the NCD holders. If the NCD amount is not redeemed within the tail period i.e. by 8 years from the date of allotment of NCD, it will trigger an event of default.

Adequacy of credit enhancement structure

The rating benefits from the credit enhancement owing to the benefits of the features of CMBS. The NCD is secured by a mortgage over the R City Mall and an exclusive charge on rental income of RMDPL. The structure also benefits from debenture trustee monitored payment mechanism, the presence of a DSRA, escrow mechanism with defined apportioning of receivables and priority for debt servicing, along with multiple call options at various maturities with cash trapping trigger mechanism providing a flexible schedule for amortisation of principal but ensuring partial repayment (10-12%) of principal by the end of five years.

 

CRISIL Ratings believes in stress case scenario if put option provider, a third party entity, could not pay within 21 days of notice, the CMBS structure has three-year tail period to repay the balance debenture through liquidation of security package during the tenure of the NCD to provide repayment to NCD holders, without default on the issuer and compulsory trapping of surplus during that period.

 

CRISIL has also considered multiple scenarios to test the adequacy of the structure, including stress scenarios where vacancy increases to 10% from current levels. CRISIL believes that the instrument will be fully serviced in a timely manner even in this most likely stress scenario.

Unsupported ratings: CRISIL AA-

CRISIL Ratings has introduced the suffix CE for instruments with an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

• Steady cash flow from lease rentals backed by strong and diversified tenant profile
• Healthy DSCR for meeting debt obligation
• Strong operational and management support from the parent

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following:

• Receipt of final executed transaction documents (Term Sheet, Debenture Trust Deed, Put Option Agreement, Corporate Guarantee, Pledge Agreement, Accounts Agreement), R&W (Representation & Warranty) documents, undertaking of execution of SPA and other relevant undertakings from issuer and external legal advisors.
• Final executed transaction documents broadly in line with terms provided during the rating exercise
• Creation of security of 100% pledged shares of RMDPL (following merger to be known as Avalor Developers)
• Payment of existing debt in RMDPL apart from the CMBS debt
• The provisional rating shall be converted into a final rating after receipt of duly executed transaction documents and on confirmation of completion of the pending steps within 90 days from the date of issuance of the proposed NCDs.
• Conversion from provisional rating to final rating will not be linked to the merger of RMDPL with Avalor Developers.

 

The 'provisional' rating shall be converted into a final rating after receipt of transaction documents duly executed and confirmation on completion of pending steps within 90 days.

 

The 'final' rating assigned post conversion shall be consistent with the available documents and completed steps. In case of non-completion of steps or non-receipt of the duly executed transaction documents within the specified timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days, in line with its policy on provisional ratings.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would not have assigned any rating.

 

Please click on link below for detailed information on CRISIL Ratings’ policy on provisional rating: Revision in CRISIL Ratings’ policy for assigning ‘provisional’ rating

Risks associated with the provisional rating

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Company

Avalor Developers, a wholly owned subsidiary of RDPL, shall raise NCDs against the securitised rentals of R City Mall and use these funds to repay outstanding debt of RMDPL and for General Corporate Purpose.

 

About the company housing the underlying asset

RMDPL is the holding company of R City Mall, which has been leased to various tenants, and has the right of receipt of lease rentals from the same. Currently, the shareholding of this company is 50% with the promoter group and 50% with Avalor.

Key Financial Indicators (Avalor*)

As on/for the period ended March 31		2023	2022
Revenue	Rs crore	0	0
PAT	Rs crore	-0.04	-0.10
PAT margin	%	0%	0%
Adjusted debt / adjusted networth	Times	0.36	-0.05
Interest coverage	Times	-55.14	NA

*The entity does not undertake any operations

 

Key terms of proposed NCD*

*The terms and covenants are as per the details provided to CRISIL Ratings at the time of assigning the rating on March 27, 2023. The updated terms are being revised and are expected to be shared by the company with CRISIL Ratings by end of October 2023. 

 

Issue size: Rs 900 crore

Objects of the issue: The proceeds of the issue are proposed to be used towards:

1. Purchase of shares of target company from Reco Ghatkopar Pte Ltd (GIC entity) with the intention of acquiring R City Mall, located in Ghatkopar West, Mumbai, from its shareholders and ultimately merging RMDPL with the issuer
2. Funding of initial DSRA
3. Repayment of external liability, if any, in the target company and general corporate purposes including issue expenses

 

Final redemption date: At the expiry of 96 months from the deemed date of allotment

List of covenants

• Issuer shall continue to remain a wholly owned subsidiary of the Runwal group. Post merger with the target company, 100% shareholding of the merged entity will remain with the Runwal group. 
• Issuer, target company and later the merged entity shall undertake not to avail any further external borrowing during the tenure of these debentures, save and except  unsecured, subordinated debt from its promoter and/or group companies controlled by the promoters, either directly or indirectly, which shall be payable only after discharge of all the obligations of the issuer, in respect of these debentures or ii) with prior consent of Debenture Trustee, which shall be only for the purpose of refinancing the outstanding NCDs
• Any debt by the promoter/group companies shall not have any default-calling rights and shall not compete with these debentures in case of insolvency/winding-up.

 

Major event of default

1. Non-payment of any NCD servicing obligation on due date
2. Breach of security cover below 1.05 times of the outstanding value of the NCDs
3. Impairment of DSRA to the extent of 50% or more than the stipulated level and the same not being replenished within 30 days from such utilisation

Any other information:

CRISIL Ratings has received an undertaking from Avalor stating that key details shared in the term sheet shall be reflected in all transaction documents and that R City Mall will not undergo any major capital expansion during the tenure of the CMBS debt.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	900	Highly Complex	Provisional CRISIL AA(CE)/Stable

 *Yet to be issued