November 8, 2017 / 2:54 AM / a year ago

Fitch Assigns 'B+(EXP)' to Jababeka's Proposed USD Notes

(The following statement was released by the rating agency) SINGAPORE, November 07 (Fitch) Fitch Ratings has assigned Indonesia-based PT Kawasan Industri Jababeka Tbk's (Jababeka, B+/Stable) proposed US dollar-denominated senior unsecured notes due in 2023 an expected rating of 'B+(EXP)', with a Recovery Rating of 'RR4'. The notes will be issued by developer's wholly owned subsidiary, Jababeka International B.V., and guaranteed by Jababeka and certain subsidiaries. The notes are rated at the same level as Jababeka's senior unsecured rating as they represent unconditional, unsecured and unsubordinated obligations of the company. The final rating on the notes is contingent upon the receipt of final documents conforming to information already received. The proposed notes will be part of the same series as the existing USD189 million 6.5% senior unsecured notes due in 2023, which are also rated 'B+' with Recovery Rating of 'RR4'. Fitch believes Jababeka's financial profile will remain unchanged and consistent with its ratings, as the new notes will be used mainly to refinance its outstanding USD91 million 7.5% senior unsecured notes, which are due in 2019, and to extend the maturity profile of the company's debt, allowing it more flexibility to manage cash flows. KEY RATING DRIVERS Improving Fundamentals, Rising Competition: Indonesia's industrial sector is showing improved demand. However, Fitch believes Jababeka may face heightened competition and some profitability margin is at risk due to new product launches in its niche and regulatory developments. Jababeka's attributable presales increased by around 40% yoy in 2016, driven by stronger industrial land demand in both its Cikarang and Kendal townships. The trend has continued, with attributable presales rising by more than 30% yoy in the 12 months to 3Q17. Fitch sees some short- to medium-term demand risk due to regulatory developments and a competitive landscape. The government has announced plans to introduce a price ceiling on Indonesia's industrial land sales, which may affect presales as some consumers defer purchases pending greater clarity. Furthermore, Fitch believes competition for residential property in Cikarang may increase with new the launch of a new township in the area. Fitch expects Jababeka to book attributable presales of IDR1.3 trillion in 2017 and IDR1.4 trillion in 2018. Solid Recurring Cash Flows: Jababeka's rating is underpinned by a strong recurring cash flow stream from its 130 MW power plant, which is operated under a 20-year power purchase agreement with the state electricity company, PT Perusahaan Listrik Negara (Persero) (BBB-/Positive). The power plant provides solid earning visibility and is a natural hedge against Jababeka's US dollar-denominated borrowings, as it operates under a cost pass-through mechanism with revenue pegged to US dollars. Fitch expects recurring interest coverage of around 1.0x in 2017 and 2018. Flexible Capex: Jababeka's capex will be limited to maintenance and development of its power plant and dry port facilities for the next few years. This, coupled with the discretionary nature of land acquisitions and construction costs that are partly contingent on meeting sales thresholds in the current period, allows the company to accumulate cash buffers and strengthen its liquidity profile. Fitch forecasts annual capex of around IDR200 billion over the medium term. Increasing Product Diversification: Jababeka successfully launched its second industrial township in Kendal last year, and its residential and commercial property business has accounted for around 40% of presales in the previous three years, compared with 14% in 2011. Fitch believes this provides the company with long-term diversification benefits. Low-Cost Land; Profitability Risk: Jababeka's credit profile is supported by its large, mature land bank in Cikarang of about 1,200 hectares; adequate for around 50 years of development assuming sales of 15 hectares per year. Cikarang is the company's most mature development, with established infrastructure and a captive industrial market. The Kendal township adds approximately 500 hectares of land bank, or 15 years of development assuming sales of 25 hectares per year. However, Fitch sees some profitability risk from the proposed caps on industrial land sale prices. Fitch forecasts Jababeka's overall real estate EBITDA margin at around 40% over the medium term. Forex and Project Concentration Risk: Jababeka's rating is constrained by its highly concentrated business in Cikarang, which Fitch expects to contribute around 70% of presales over the medium term. We expect concentration risk to gradually dissipate with the increasing contribution from the Kendal estate. The company is also exposed to currency fluctuations, as most of its debt is US dollar-denominated, while only half of its revenue is linked to the US dollar. DERIVATION SUMMARY Jababeka's rating may be compared with other Fitch-rated Indonesian property developers, such as PT Modernland Realty Tbk (B/Stable) and PT Bumi Serpong Damai Tbk (BSD; BB-/Stable). Fitch assesses Jababeka's credit profile as weaker compared with BSD's, as indicated by Jababeka' smaller development property scale, higher leverage, lower presale turnover and weaker recurring interest coverage. Compared with Modernland, Fitch believes Jababeka's stronger recurring interest coverage and the more strategic location of its industrial development, which is evident from gap in selling prices in their respective townships, supports its higher rating. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Attributable presales of IDR1.3 trillion in 2017 and IDR1.4 trillion in 2018 - Land acquisitions of around IDR300 billion in 2018 - Construction capex of around IDR800 billion in 2018 Key Recovery Rating Assumptions: - The recovery analysis assumes Jababeka would be liquidated in a bankruptcy rather than continue as a going-concern because it is an asset trading company. - Recovery analysis applied a haircut of 25% for IDR628 billion of receivables, 50% for IDR1.5 billion of investment property, 50% for IDR166 billion of affiliates and minority interest and other assets and no haircut for inventory and land bank. Fitch believes the company's reported land bank value, which is based on historical land cost, is at a significant discount to current market value and, thus, is already conservative. - Jababeka's power plant fixed assets and land bank located in Kendal are excluded from the liquidation value estimate as they are located under subsidiaries that are not part of the company's US dollar senior unsecured bonds' guarantor group. - 10% administrative claims are applied on the liquidation value. - Jababeka's bank loans of around IDR440 billion are secured by the company's land bank. Its remaining unused balance on its loan facilities are also assumed to be fully drawn. Jababeka is also expected to have around USD290 million of senior unsecured bonds outstanding, inclusive of the new issue. - Fitch estimates Jababeka's liquidation value to be able to cover 91%-100% of its secured and unsecured debt, corresponding to a 'RR1' Recovery Rating for the senior unsecured notes after adjusting for administrative claims. Nevertheless, Fitch has rated its senior unsecured bonds at 'B+' with a Recovery Rating of 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings criteria, Indonesia falls into the 'Group D' of countries based on creditor-friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR. RATING SENSITIVITIES Positive rating action is not expected due to limited project scale and exposure to the highly cyclical industrial development business. Developments that may, individually or collectively, lead to negative rating action include: - Recurring EBITDA/interest expense at less than 1.0x for a sustained period (2017F: 1.2x) - Attributable presales/gross debt at less than 40% for a sustained period (2017F: 30%) - Net debt/net inventory at more than 60% for a sustained period (2017F: 47%) LIQUIDITY Sufficient Liquidity: As of end-2016 Jababeka had an adjusted cash balance of around IDR740 billion, short-term debt maturity of IDR20 billion and a committed unused credit facility of around IDR490 billion, which is only available to be drawn down until 1Q17. The company does not plan to construct a second power plant in the short to medium term, and its capex for the next few years will be limited to maintenance and development of its power plant and dry port infrastructure facilities. This, coupled with the discretionary nature of land acquisitions and construction costs that are partly contingent on meeting sales thresholds in the current period, allows the company to accumulate cash buffers and strengthen its liquidity profile Contact: Primary Analysts Bernard Kie Associate Director +65 6796 7216 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Hasira De Silva, CFA Director +65 6796 7240 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 16 August 2017 Summary of Financial Statement Adjustments - Fitch has proportionately consolidated the key financials of a number of Jababeka's subsidiaries to reflect their significant minority interests. In addition, Jababeka reports additions to land for development as cash flow from investments. Fitch has deducted this item from cash flow from investments and added it to working capital as cash paid to suppliers, as Fitch treats such payments as working capital outflows Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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