Russian developers 'most vulnerable' to credit crunch - Fitch

Russian property development companies are likely to be among the worst hit by the deteriorating financing environment, Fitch Ratings said this week.

'This is because of a large share of short-term debt in their liquidity profiles, their often significant operational cash outflows, limited cash-on-balance sheet and a virtual absence of meaningful committed undrawn facility headroom,' the rating agency said.

Although the state-owned bank VneshEconomBank (VEB) is to provide up to $50 bn to help refinance Russian corporate debt, the ratings agency remains sceptical, saying that this will simply provide short-term support rather than a long-term solution to liquidity risks in Russia.

According to Julian Crush, senior director, Fitch's Corporates, there are 'increasing question marks over the ability and appetite of all but the largest Russian domestic banks to maintain current funding levels to the real estate sector,' despite the Russian government’s moves and 'liquidity risks associated with Russian property developers have never been higher.'

The rating agency said it believes that the preparations by the management of some Russian development companies have been inadequate to deal with the current condition of the financing market. 'There is a fundamental mismatch of assets (long-term) and liabilities (short-term) some commercial property-focused developers. '

The statement also questioned the long-running assumption among Russian property developers that it would always be relatively easy to sell assets and banks would always be willing to refinance short-term debt maturities.

'This is no longer the case. A general lack of funding could mean selling property assets will become more difficult and could also be the catalyst to a more general fall in real estate prices, potentially leading to further deterioration in bank market sentiment towards real estate lending. A common financing strategy for Russian property developers has been to term-out average debt maturity by accessing international capital markets and undertaking syndicated loan issuance. Both of these financing options currently look difficult, exacerbating the impact of a squeeze in the domestic bank market,' the statement said.