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Fitch Assigns First-Time 'BB-' Rating to Agung Podomoro Land
May 22, 2017 / 4:25 AM / 7 months ago

Fitch Assigns First-Time 'BB-' Rating to Agung Podomoro Land

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, May 22 (Fitch) Fitch Ratings has assigned Indonesia-based property developer PT Agung Podomoro Land Tbk (APLN) a first-time Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook. The agency has also assigned a 'BB-(EXP)' expected rating to the proposed unsecured unsubordinated US dollar notes to be issued by APLN's wholly owned subsidiary APL Realty Holdings Pte Ltd. The proposed US dollar notes will be guaranteed by APLN and several of its subsidiaries. The final rating on the notes is contingent upon the receipt of final documents conforming to information already received. APLN is a leading property developer in Indonesia with a land bank of more than 8 million square metres (sq m), and investment properties and hotels that generated a combined recurring revenue of IDR1.6 trillion (around USD120 million) in 2016. APLN's property sales and investment properties are widespread, and sales are diversified across the low-, middle-, and high-income customer segments. The proposed notes are rated at the same level as APLN's Long-Term IDR because they constitute direct and unsubordinated obligations of the company. APLN expects to use part of the proceeds to refinance existing local-currency secured debt, which will free up more of its property portfolio from encumbrances. Therefore Fitch expects APLN's secured debt/EBITDA to remain below the 2.0x-2.5x threshold (2016 pro forma for bond issuance: 2.2x; 2017 forecast: 1.8x) - the point beyond which Fitch considers unsecured creditors recoveries to be significantly affected. KEY RATING DRIVERS Strong Investment Property Portfolio: APLN's investment property portfolio consists of 11 retail malls and one office building, as well as six hotels, which generated a combined recurring revenue of over IDR1.6 trillion in 2016, and is valued at IDR21.7 trillion (around USD1.6 billion). Recurring revenue from APLN's malls benefit from their mostly prime locations and strong footfall as a result of being located mostly within "superblocks" consisting of retail, commercial, hospitality and residential assets developed by APLN. Average mall occupancy was healthy at 85% in 2016, in spite of two of its larger properties - Kuningan City and Baywalk Mall - undergoing strategic changes to its tenant profile. The tenant risk in APLN's malls is well dispersed, with the 10 largest tenants accounting for 16.4% of mall revenue in 2016. Lease tenors were four to five years on average, and provide good revenue visibility. APLN has a further four malls and two five-star hotels in the pipeline, which the company expects will be commissioned in the next three years and to boost recurring revenue. Recurring revenue covered APLN's net interest costs by 2.7x in 2016, and Fitch expects this to improve to 3.0x-3.3x over the next two years. Fitch adds dividends received from associates and deducts minority interests' share of the profit when calculating the recurring revenue coverage ratio. Presales to Grow in 2017: We expect APLN's property sales to improve to around IDR4 trillion-5 trillion in 2017, supported by its geographical and product diversity. Our expectations are driven by improving demand for property purchases, following the government's fairly successful tax amnesty programme that concluded in March 2017 and regulatory measures to reignite the property market. We expect APLN's property sales to benefit from the strategic positioning of its assets, as well as its sales diversity across products and customer segments. In 2016, 38% of APLN's property sales were from the low-income customer segment, up from 14% in 2015. Demand from customers in this segment is more resilient to downturns because it is driven by first-time homebuyers rather than upgraders or property investors. Moderate Financial Profile: APLN has historically maintained a modest financial profile, with leverage defined as net debt / adjusted inventory at 33% in 2016 and 27% in 2015. We expect leverage to increase marginally to around 34%-35% over the next two years, driven mostly by the expansion of the investment property and hotel portfolio. APLN has a limited number of joint-ventures that provide a limited risk of structural subordination to its creditors - but this stems mainly from its industrial estates, which it is likely to dispose of in the next two years. Pluit City Risks: The development of APLN's "Pluit City" project involving the reclamation of an island off the coast of Jakarta was halted in May 2016 by the Environment Ministry, which called for a review of the environmental impact in relation to the proposed National Capital Integrated Coastal Development plan. APLN had presold around IDR5 trillion worth of property in this project at the time it had to be halted, and had collected over IDR2 trillion of advances from customers. The company expects to receive the approval to continue with the project in the near term, and has provided for capex of around IDR400 billion for 2017. However, Fitch has excluded future sales from this project from our rating case - given the significant uncertainty around the legal proceedings. The company says this project is potentially worth a further IDR5 trillion in sales over the medium term. In the event that APLN is unable to restart the development of this project in a timely manner, there is a risk that the company may have to refund the advances it had collected. We estimate APLN's leverage to rise to 46% in a worst-case scenario where the company has to borrow to issue the refund, from 33% in 2016. There is a further risk that APLN may not be able to recover the IDR2 trillion of costs already spent on the island development. DERIVATION SUMMARY APLN compares well with other 'BB-' rated Indonesian property developers, such as PT Pakuwon Jati Tbk (PWON, BB-/Stable) and PT Bumi Serpong Damai Tbk (BSD, BB-/Stable). APLN has a more geographically diverse property development business than BSD, although BSD's scale of operations is much larger than that of APLN. APLN's investment property and hotel portfolio has a similar number of assets as BSD, but APLN has a higher mix of high-end assets which benefit from stronger demand. PWON has a similar development scale as APLN, and a more geographically concentrated project profile. PWON's investment property portfolio has a higher mix of high-end assets than APLN, but exhibits higher asset concentration. All three companies have similar levels of leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Annual presales of between IDR4 trillion-IDR5 trillion in 2017 and 2018 - Recurring revenue of IDR1.9 trillion and IDR2.2 trillion, respectively, in 2017 and 2018 - No incremental presales from the Pluit City project; Pluit City capex limited to around IDR400 billion in 2017 - Investment property and hotel capex of around IDR900 billion in 2017 and IDR700 billion in 2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action We do not expect any positive rating action in the next two years, given the smaller scale of APLN's investment property and hotel portfolio compared with higher-rated international peers. Over the longer term, the following may lead to positive rating action: - Growth in investment properties and hotel assets such that recurring revenue increases to more than IDR3 trillion, with the five largest properties accounting for less than 50% of recurring revenue - Recurring revenue net interest cover ratio sustained above 4.5x - Net debt / adjusted inventory sustained below 30% Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Recurring revenue net interest cover ratio sustained below 3.0x - Net debt / adjusted inventory sustained higher than 40% LIQUIDITY Strong Profile Supports Liquidity: We expect APLN's cash reserves and available committed but undrawn credit facilities to fall marginally short of 2017 debt maturities and our estimates of negative FCF. However, we believe APLN's strong operating profile as one of the leading property developers in Indonesia, its established track record and asset quality supports access to domestic banks and capital markets. In addition, the proposed US dollar unsecured notes, if successful, will boost liquidity by refinancing near-term maturities and lowering the cost of debt. Property developers also have a degree of flexibility to limit land purchases and development capex on landed-housing during periods of weak demand, which also supports liquidity during downturns. FULL LIST OF RATING ACTIONS PT Agung Podomoro Land Tbk --Long-Term Issuer Default Rating: Assigned at 'BB-'; Stable Outlook APL Realty Holdings Pte Ltd --Long-term expected rating on proposed unsecured unsubordinated notes: Assigned at 'BB-(EXP)' Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Bernard Kie Associate Director +6221 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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