Fitch Ratings on Friday assigned Indian Express Newspapers (Mumbai) Limited (IENML) a national long-term rating of ?A-? implying a stable outlook. At the same time, the agency has assigned ?A-? ratings to the company?s long-term loans aggregating Rs 931.3 million (Rs 93.13 crore) and to its new loans aggregating Rs 606.5 million (Rs 60.65 crore).

IENML housed both the rental income from its commercial real estate property, the Express Towers Building (?the building?), and a publication division. During FY07-FY08, IENML underwent a demerger into two separate companies, with the publication division, The Indian Express Limited (TIEL), separated from the company. Post-demerger, IDBI Trusteeship Services, in the capacity of Trustees of India Advantage Fund III, acting through its investment manager ICICI Venture Fund Management directly and indirectly, acquired a 49% stake in IENML.

IENML?s ratings are primarily driven by the reasonable stability of the building?s rental revenues, which are governed by long-term contractual agreements with an average lock-in period of 33 months with its tenants. Fitch acknowledges that with a substantial portion of these agreements coming to an expiry over FY10 and FY11, the revenues are subject to renegotiation risk; according to the terms of most of the contractual agreements, the tenants can vacate the premises after giving a six-month notice once the lock-in period is up. Fitch notes that over the last six months IENML’s management has re-negotiated with a majority of the tenants, and signed contracts at higher rates. Fitch will monitor any significant decline in the rental rate per square feet, as well as the building?s occupancy levels due to the migration of clients to other locations.

The ratings are strengthened by the consistent positive free cash flows and the strong Ebitda margin that the rental business generates. This is primarily on account of the high rental rates (versus the low maintenance cost on a per square feel basis), which has resulted in Ebitda margins of over 70%. The ratings also take comfort from the asset quality of the building given its prime location in Mumbai – this has resulted in occupancy levels of more than 80% over the last five years.

Negative ratings triggers would include any significant decline in occupancy rates or dividend payments leading to a decline in debt service coverage ratio below 1.2 on a sustained basis. Fitch also notes that litigation is ongoing between IENML and some of its tenants regarding payments, and that any adverse judgement by the court on these cases would have negative implications for the ratings.

Fitch notes that in accordance with the scheme of demerger, the combined debt of the previous combined entity has been divided between IENML and TIEL. As of October 2009, the total combined amount of debt outstanding in the escrow account was Rs 1,982.5 million (Rs 198.25 crore), of which Express Towers? share is Rs 931.3 million (Rs 93.13 crore). TIEL is currently paying its share of the loans through IENML for convenience of combined repayments. Though the combined escrow loans are still secured by a charge on the building, the agency has not factored in TIEL’s portion of debt into IENML’s ratings. According to the shareholders agreement, this charge would be released from the building in October 2010; if this does not happen it would act as a downward ratings trigger.

For FY09, IENML?s revenue was Rs 701.4 million (Rs 70.14 crore) with an Ebitda margin of 76.4%. The leverage and net debt position remain comfortable at net debt/Ebitda of 2.3x and an interest cover of 3.7x.