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Fitch Assigns Modernland's USD240m Notes 'B' Final Rating
April 11, 2017 / 2:51 AM / 7 months ago

Fitch Assigns Modernland's USD240m Notes 'B' Final Rating

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, April 10 (Fitch) Fitch Ratings-Singapore/Jakarta-11 April 2017: Fitch Ratings has assigned Indonesia-based PT Modernland Realty Tbk's (Modernland, B/Negative) USD240 million 6.95% senior unsecured notes due in 2024 a final rating of 'B' with a Recovery Rating of 'RR4'. The notes are issued by Modernland's wholly owned subsidiary, Modernland Overseas Pte Ltd, and guaranteed by Modernland and certain subsidiaries. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 3 April 2017. The notes are rated at the same level as Modernland's senior unsecured rating as they represent unconditional, unsecured and unsubordinated obligations of the company. Fitch believes Modernland's financial profile will remain unchanged and consistent with its rating, as proceeds from the new notes will be used mainly for refinancing and to extend the maturity profile of the company's debt, allowing it more flexibility to manage cash flows. The company plans to use the proceeds to partly redeem its existing USD248 million 9.75% senior unsecured notes maturing in 2019. KEY RATING DRIVERS Negative Outlook; Recovering Macroeconomic Condition: The Negative Outlook on Modernland's Long-Term Issuer Default Rating (IDR) reflects the risk that the company could breach a number of its local-currency debt covenants in 2017, as EBITDA may remain weak unless presales improve in the next six to 12 months. In 2016, Modernland reported presales of around IDR4.5 trillion (2015: IDR3.1 trillion). However, this included IDR3.2 trillion booked as proceeds from a one-off land sale to a joint venture (JV) between Modernland and PT Astra Land Indonesia, where Modernland will only receive half of this sale in cash, with the balance going towards its investment in the JV. In Fitch's view, Modernland may not achieve its presales target for 2017, as the domestic macroeconomic environment is only starting to recover and we believe there will be a lag before we see a sustained improvement in demand for property. Nevertheless, the company may take measures to improve the recognition of EBITDA or obtain waivers on covenant breaches. Volatile Industrial Cash Flows: Around 70% of Modernland's contracted sales in 2016 stemmed from industrial land sales and the one-off land sale to the JV. Therefore its cash flows tend to be more volatile during economic downturns than those of peers that depend on residential sales. Nevertheless, the low development risk associated with industrial land sales mitigates this cash flow volatility. Modernland has a 20-year track record in developing industrial estates, and has built strong relationships with tenants. Its flagship Cikande industrial estate has a very low average land cost compared with the current average selling price (ASP) of around IDR1.7 million per square metre (sqm), and Modernland has sufficient land to continue developing there for around five years, even if we assume that the company makes no further land acquisitions. Fitch believes Modernland can build on its success in Cikande and replicate its business model for future developments in its newer industrial estate in Bekasi. Limited Residential Track Record: Fitch expects Modernland's residential and commercial segment to account for around 55% of presales by 2018, driven by the Jakarta Garden City (JGC) project and the new launches in Bekasi. The growing proportion of residential sales will counterbalance volatility in industrial land sales, but Modernland's track record in developing an integrated, large-scale residential project is still limited relative to the other rated developers, like PT Bumi Serpong Damai Tbk (BB-/Stable), PT Lippo Karawaci Tbk (BB-/Stable) and PT Alam Sutera Realty Tbk (B+/Negative). Manageable Forex Risk: Modernland has entered into a few call-spread options to partially hedge the principal of its USD248 million bond due 2019, covering rupiah depreciation of up to IDR15,500 per US dollar. The company is also planning to enter into a similar hedging arrangement for its new proposed bond. In addition, Fitch believes Modernland's thick margins are sufficient to absorb short-term currency volatility. DERIVATION SUMMARY Modernland's rating is well-positioned relative to other Fitch-rated property developers, such as PT Kawasan Industri Jababeka Tbk (KIJA, B+/Stable) and PT Alam Sutera Realty Tbk (ASRI, B+/Negative). Fitch believes that KIJA's stronger recurring interest coverage, lower leverage and relatively more strategic industrial development location compared to that of Modernland supports its higher rating. We believe ASRI's longer track record in residential developments and more defensive cash flow mix support a higher rating than Modernland. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales of around IDR2.1 trillion in 2017 - Land acquisition capex of around IDR350 billion in 2017 RATING SENSITIVITIES Future developments that may, individually or collectively, lead to negative rating action include: - If there are heightened risk that the company may breach covenants on its local-currency debt, or the company fails to negotiate waivers on covenant breaches - Presales/ gross debt sustained at less than 40% (2016: 62%) Future developments that may, individually or collectively, lead the Outlook to be revised back to Stable include: - If the risk of the company breaching its local-currency debt covenants is reduced, or the company successfully manages to negotiate waivers on covenant breaches LIQUIDITY As of December 2016, Modernland has readily available cash of around IDR400 billion compared with IDR470 billion of maturing short-term debt. We currently expect the company to post positive FCF of around IDR400 billion for 2017, which supports its liquidity. Modernland's capex in the short term is going to be limited to construction costs, which are partly contingent upon meeting sales thresholds in the current period. This, coupled with the discretionary nature of land acquisitions, may allow Modernland to accumulate cash and shore-up its liquidity profile. Liquidity is also supported by Modernland's access to local banks. Contact: Primary Analyst Hasira De Silva, CFA Director +65 67967240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Bernard Kie Associate Director +62 21 2988 6815 PT Fitch Ratings Indonesia DBS Bank Tower Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 30 June 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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