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Fitch Assigns Bumi Serpong's USD200m Notes 'BB-' Final Rating
October 13, 2016 / 7:27 AM / a year ago

Fitch Assigns Bumi Serpong's USD200m Notes 'BB-' Final Rating

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, October 13 (Fitch) Fitch Ratings has assigned Indonesia-based PT Bumi Serpong Damai Tbk's (BSD, BB-/Stable) USD200m 5.5% senior unsecured notes due in 2023 a final rating of 'BB-'. The notes are issued by BSD's wholly owned subsidiary Global Prime Capital Pte. Ltd, and guaranteed by BSD and its subsidiaries. The final rating follows the receipt of documents conforming to the information already received and is in line with the expected rating assigned on 28 September 2016. The notes are rated in line with BSD's senior unsecured rating, as they represent unconditional, unsecured and unsubordinated obligations of the company. BSD will use most of the proceeds from the new notes to buy back part of its existing USD225m 6.75% senior unsecured notes, which are due in 2020, to lengthen the company's debt maturity profile and reduce its average borrowing costs. The rest of the proceeds from the new issue will be used for business expansion and working capital. Fitch estimates that, on a pro-forma basis, BSD's leverage (net debt/adjusted inventory) will increase to around 20% after the note issue, compared with 17% at end-June 2016. The company's ratio of investment property EBITDA to net interest expense will reduce to 1.9x after the new issue from 2.0x at end-June 2016. These ratios are within Fitch's parameters for BSD's 'BB-' rating. KEY RATING DRIVERS Presales Outperformed Peers: BSD's marketing sales improved 8% year over year in 2Q16. However marketing sales fell 27% in 1H16 compared with the same period last year due to a weak 1Q16 as most Indonesian developers delayed property launches amid weak demand. We continue to expect BSD to sell around IDR6.4trn of properties in 2016, which is close to the company's own target of IDR6.8trn. Marketing sales of the other seven Indonesian homebuilders that Fitch tracks fell by 43% in 1H16 and 32% in 2Q16, compared with their corresponding periods in 2015. BSD's diversity across property products and price points is a key driver of its performance, allowing the company to adjust its sales plans to match demand. Strong Recurring Cash Flow: Investment properties (IP) generated around USD67m in EBITDA in 2015. In 1H16, IP EBITDA increased by 3% over the corresponding period last year to IDR438bn. The company owns 18 assets, including suburban retail malls catering to the mass market, a mix of prime and suburban office space and two resort hotels. While IP EBITDA growth has lagged Fitch's expectations due to slower ramp-up of some of BSD's newer properties, overall occupancy was strong at 95%. Asset concentration is modest, with the five largest IP assets accounting for 62% of IP revenue in 2015. Subsidiary Owns Investment Property: Most of BSD's investment property is held through its 88.56% owned listed subsidiary, PT Duta Pertiwi Tbk (DUTI). A significant dilution in BSD's ownership of DUTI, although not expected in the medium term, may reduce BSD's access to DUTI's recurring cash flow and increase risk to BSD's creditors. Strong Balance Sheet, Large Land Bank: BSD has a track record of maintaining a strong balance sheet. At the end of June 2016, its leverage was just 16.8%. Fitch expects leverage to remain below 25% over the medium term. BSD's land bank amounted to 39.5 million square meters at the end of 2015. Uniquely, the title to around 63% of BSD's land bank is under the company founders' names, an arrangement dating back to BSD's inception. A legally binding agreement confers the rights to develop the land to BSD. To be conservative, Fitch has excluded the portion of land under the founders' names from its leverage calculation. But it should be noted that this agreement has not been breached since its inception. High Capex, Geographically Concentrated Sales: BSD expects to spend around IDR8trn between 2016 and 2018 on expanding its investment property portfolio to over 30 properties. Fitch expects execution risk to be mitigated by the company's track record of successfully developing similar properties. BSD anticipates spending a further IDR2trn on land banking annually until 2018. In 2015, nearly 70% of BSD's presales were within the BSD City township in the Serpong region outside Jakarta, but were diversified across various residential and commercial clusters. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales of IDR6.4trn in 2016 - Cash collection cycle on development projects to remain between two to three years on average, in line with current trends - Investment properties to generate around IDR1.2trn EBITDA in 2016 - BSD to spend over IDR6trn on capex in 2016 and 2017 and around IDR4trn on land banking over the same period RATING SENSITIVITIES Positive: Fitch does not expect BSD's ratings to be upgraded in the next 24 months, given the company's evolving investment property portfolio compared to higher rated international peers and high capex and execution risks related to the investment property expansion. Over the longer-term, the following may result in an upgrade: -Increased scale and granularity of the investment property portfolio, so it generates EBITDA of more than USD120m, with the five largest assets accounting for less than 50% of revenue in this segment -Investment property EBITDA/net interest expense higher than 2.5x -Leverage sustained below 30% Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Investment property EBITDA/net interest expense sustained below 1.75x -Leverage sustained above 40% LIQUIDITY Strong Liquidity: At the end of June 2016, BSD had IDR5.6trn of readily available cash against IDR8.8trn of gross debt. IDR2trn of debt consists of short-term secured working capital facilities, with a further IDR403bn of current maturities and capital leases. Fitch expects BSD to generate a free cash outflow of around IDR800bn in 2016, after factoring in capex and land banking. The company also has a further IDR750bn of approved but unutilised credit facilities outstanding. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard 35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Bernard Kie Analyst +6221 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 16 March 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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