June 23, 2017 / 8:34 AM / a month ago

Fitch Downgrades Multipolar to 'B-'/'BBB-(idn)'; Outlook Stable

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(The following statement was released by the rating agency) SINGAPORE/JAKARTA, June 23 (Fitch) Fitch Ratings has downgraded Indonesian holding company PT Multipolar Tbk's Long-Term Issuer Default Rating to 'B-' from 'B'. The Outlook is Stable. The agency has also downgraded Multipolar's senior unsecured rating and USD230 million notes due 2018 to 'B-' from 'B', with Recovery Rating of 'RR4'. The notes were issued by Pacific Emerald Pte Ltd, a wholly owned subsidiary, and guaranteed by Multipolar and certain subsidiaries. At the same time, Fitch Ratings Indonesia has downgraded the National Long-Term Rating to 'BBB-(idn)' from 'BBB+(idn)'. The Outlook is Stable. The downgrade reflects our expectation of Multipolar's weaker credit profile on account of persistently weak performance from PT Matahari Putra Prima Tbk (MPPA) for the next two years due to increasing mini-market format competition. Cash flow pressure from weakening margins along with capex requirements for store expansion will affect MPPA's shareholder distribution ability. This will make Multipolar more reliant on dividends from PT Matahari Department Store Tbk (MDS). We expect Multipolar's fixed-charge coverage to remain below 1.0x in 2017 and 2018, as measured by (consolidated Multipolar EBITDA - MPPA EBITDA + dividends + rent)/(adjusted interest + rent). 'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Persistently Weaker MPPA Performance: Multipolar's weaker credit profile reflects our expectation of sustained pressure on MPPA's pre-dividend free cash flows from increasing mini-market format competition, store expansion targets and a rising need for promotional activity to support store traffic. MPPA continued to suffer from negative same-store sales growth of -6.9% in 1Q17 (2016: -4.5%) and a higher operating expense ratio of 20.9% (2016: 15.8%), leading to negative EBITDA of -IDR126 billion in 1Q17 (1Q16: -IDR23 billion). Solid Profile of MDS: The solid financial performance of MDS ensures stable dividends for Multipolar. MDS had ample liquidity at end-2016, with a IDR1.7 trillion cash balance and no interest-bearing debt on its balance sheet. We expect MDS to generate a stable profit margin, with an EBITDA margin of around 16% and net profit margin of 11%. MDS distributed 70% of net income as dividends in 2016 and we expect stable dividend upstream in 2017 and 2018. Fitch sees the business profile of MDS as supportive to Multipolar's rating given MDS's market leadership status in Indonesia's department store business and benign competition in the non-food retail segment. Decreasing Fixed-Charge Coverage: Fitch expects fixed-charge coverage to decline to below 1.0x in 2017 and 2018 - our previous threshold for negative rating action. Multipolar's subsidiaries, with the exception of PT Multipolar Technology Tbk (MLPT), have been generating volatile EBITDA. An improvement in MPPA-deconsolidated EBITDA will depend on an immediate turnaround of Multipolar's China operation, significant expansion of its other small businesses and stable performance from its property management companies. We expect the ratio to remain low from a combination of persistent weakening in MPPA performance and profit volatility at most of its subsidiaries. Large Cash Balance: Liquidity at Multipolar holding company level will be supported by an ample cash balance of around IDR1.7 trillion at end-2016 from the sale of a 3% stake in MDS in September 2016. We estimate that the strong cash balance and steady dividend upstream from MDS will be adequate to cover holding company expenses and interest costs in 2017 and 2018, as the IDR120 billion short-term revolving facility was fully utilised at end-2016. Manageable Refinancing Risk: The rating takes into account our expectation that Multipolar's management is proactively addressing the maturity of the USD230 million senior unsecured notes in July 2018 and is currently in discussions with lenders. Dividend Reliance: Multipolar's rating reflects the structural subordination that arises from its group structure. Multipolar is a holding company that owns majority stakes in companies involved in businesses such as retail, IT services (MLPT) and property management (PT Matahari Pasific (MP) and PT Nadya Putra Investama (NPI)). Most of Multipolar's cash flow is generated from upstream stream of dividends from its investment in Indonesian retailers, MPPA and MDS, of which Multipolar owns 50.2% and 17.48%, respectively. DERIVATION SUMMARY Credit metrics and cash flows of Mutlipolar rely on dividend inflow from subsidiaries, similarly to PT Indika Energy Tbk (B-/Stable). Indika's dividends mostly come from its coal mining company, PT Kideco Jaya Agung, while Multipolar's dividends come from its non-food retail operation, MDS. Both companies have an adequate cash balance at the holding company level to fund short-term operations and expenses. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 10% revenue growth per annum (2016: -10%) and a stable EBITDA margin of around 9%-10% for MLPT for 2017-2018 (2016: 11%) - Annual capex of IDR300 billion-400 billion for subsidiaries other than MPPA from 2017 to 2018 - Stable dividends upstream from MDS in 2017 and 2018 RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Fixed-charge coverage, adjusted for MPPA deconsolidation and dividends, rising above 1.0x on a sustained basis Developments that May, Individually or Collectively, Lead to Negative Rating Action - Weakening liquidity as indicated by significant decline in cash balance or weaker access to banking facilities - Deterioration in MDS operating performance that would limit its ability to pay dividend LIQUIDITY Adequate Short-Term Liquidity: Multipolar had more than IDR3.4 trillion in cash against the IDR96 billion maturity of long-term debt and IDR504 billion maturity of its short-term revolving loan at end-2016. We expect subsidiaries, such as MPPA, MLPT, MP, NPI and PT Multifiling Mitra Indonesia Tbk, will be able to manage their liquidity comfortably given their adequate credit metrics. On the other hand, we expect the credit facility at weaker subsidiary, PT Kharisma Artha Sejati, to continue being rolled-over. Contact: Primary Analyst Hasira De Silva, CFA (International Ratings) Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Olly Prayudi (National Ratings) Associate Director +62 21 2988 6812 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Secondary Analyst Olly Prayudi (International Ratings) Associate Director +62 21 2988 6812 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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