November 6, 2017 / 9:07 AM / 8 months ago

Fitch Removes Alam Sutera from Negative Watch; Affirms at 'B'

(The following statement was released by the rating agency) SINGAPORE, November 06 (Fitch) Fitch Ratings has removed the ratings of Indonesia-based property developer PT Alam Sutera Realty Tbk (ASRI) from Rating Watch Negative (RWN) and simultaneously affirmed the company's Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. The agency has also affirmed ASRI's senior unsecured rating and the ratings on all its outstanding senior unsecured notes at 'B' with a Recovery Rating of 'RR4'. A full list of rating actions is at the end of this commentary. The affirmation of the ratings follows the company's announcement on 2 November 2017 that it has received the requisite consent from the holders of its outstanding US dollar senior unsecured notes to waive the breach of the restricted payment covenant in the bond indentures. The company is due to pay the consent fee on or around 6 November 2017. The notes are issued by ASRI's 100%-owned subsidiary Alam Synergy Pte Ltd and guaranteed by ASRI. ASRI's 'B' ratings reflect its large low-cost land bank of more than 19 million square metres (sq m), healthy profit margins, moderate leverage and comfortable liquidity, and factor in our expectations that its annual property pre-sales will remain subdued at less than IDR3.5 trillion in the medium term. KEY RATING DRIVERS Pre-Sales Continue to Lag: ASRI's 4Q17 transactions could help the company meet its pre-sales target by year-end, although 9M17 pre-sale underperformance underlines the non-negligible sales execution risk associated with current operations. One major issue is the lack of sales progress from its prime office project, The Tower, which represented 40% of the original 2017 contracted sales target. Positively, we expect most of ASRI's deliveries to its Chinese development partner, China Fortune Land Development (CFLD), to be fulfilled during 2017, despite a delay on titles for a small number of parcels. Land Sales Increase Concentration: ASRI's liquidity has benefited from its partnership with CFLD in its second township project in Pasar Kemis, under which CFLD buys raw, zoned land from ASRI's deep local land bank in the area. This offtake does, however, significantly increase concentration around one buyer for a large portion of ASRI's cash flow. CFLD's involvement will accelerate the achievement of critical mass for a development located on the outer edge of greater Jakarta, but also ties ASRI's own land bank in the area more closely to the development success or failure of a third party. Development Strategy in Mild Shift: ASRI's original Alam Sutera township, close to Jakarta's central business district (CBD) and served by retail, commercial and increasingly light-business properties, is approaching a mature phase. Future residential developments will probably use more high-rise units, where ASRI has a shorter record, rather than houses. Commercial projects are also likely to feature condominiums as part of mixed-use developments, notably in potential redevelopment of ASRI's other Jakarta CBD property, the older Wisma Argo Manunggal centre. The property's scheduling will be timed in line with progress on sales from the completed The Tower project. Solid Land Bank: The company has a large low-cost land bank and an established domestic franchise. The land bank extended to over 18.9 million sq m available for development with a carrying value of IDR9.4 trillion as at June 2017. In particular, ASRI still benefits from 150 hectares of prime development land bank within the original Alam Sutera township plus adjacent land purchased or under negotiation for purchase from fellow developer, PT Modernland Realty Tbk (B/Stable) and other land owners. Finances Still Stretched: Land sales, including to CFLD, have helped plug lower-than-anticipated pre-sales in a market already facing challenges from continued supply growth. This prudent move has been at the cost of lowering operating cash flow quality and overall realisation from the company's land bank. Operating cash flow and working capital have been volatile over recent periods, with gross debt climbing as pre-sales and booked revenue fall. DERIVATION SUMMARY ASRI's Long-Term IDR is well-positioned relative to peers, such as Modernland and PT Kawasan Industri Jababeka Tbk (B+/Stable). Around half of ASRI's and Modernland's property sales consist of commercial and industrial property. Demand for these types of properties is more cyclical during economic downturns than for residential properties. However, ASRI has a better record of selling residential properties and a larger land bank to support sales compared with Modernland. Still, Modernland has demonstrated stronger sales execution during the recent downturn. These reasons, combined with our view that both companies will maintain comparable leverage levels, supports similar ratings. Jababeka is one of Indonesia's largest industrial property developers, but its Long-Term IDR is primarily driven by the strong recurring cash flows it derives from its thermal power plant, which has a 20-year power purchase agreement with the state-owned PT Perusahaan Listrik Negara (Persero) (BBB-/Positive), as well as from its dry port. These cash flows provide adequate cover for Jababeka's interest expenses across economic cycles. The stability of its recurring cash flow supports a higher rating than for ASRI, whose property sales have been volatile in the last two years. The cyclicality of Jababeka's industrial property sales are counterbalanced by limited infrastructure and capex requirements. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Annual property pre-sales of around IDR3 trillion in 2017 and 2018 - The pace of cash collection to increase in the next two years because sales to CFLD and from commercial properties will make up a larger portion of ASRI's contracted sales than in the past - 40% of the refundable IDR1.4 trillion deposit received from CFLD, which is in an escrow account to be deployed against land acquisitions, has been treated as restricted cash - EBITDA margins to remain between 65%-70% in the next two years (2016: 60%), supported by the higher mix of land sales and commercial properties in the pipeline - ASRI to spend around IDR600 billion and IDR1 trillion on land banking in 2017 and 2018, respectively Key Recovery Rating assumptions: - The recovery analysis assumes ASRI will be liquidated in a bankruptcy rather than continue as a going-concern because it is an asset trading company - For estimating the liquidation value, we have assumed a 75% advance rate against the value of accounts receivable as well as adjusted inventory, and a 50% advance rate against its fixed assets - We have assumed that ASRI's IDR1.5 trillion secured bank loans outstanding as of 31 December 2016 will rank prior to its USD480 million senior unsecured notes in a liquidation, as well as the secured IDR200 billion undrawn bank facilities outstanding as of the same date which we assume will be fully drawn down prior to liquidation - We have deducted 10% of the resulting liquidation value for administrative claims - The above estimates result in a recovery of 100% of ASRI's unsecured debt, corresponding to a 'RR1' Recovery Rating for the senior unsecured notes. Nevertheless, Fitch has rated the senior notes at 'B' with a Recovery Rating of 'RR4' because under Fitch's Country-Specific Treatment of Recovery Ratings criteria, Indonesia falls into 'Group D' of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Annual contracted sales, including sales to CFLD, sustained at more than IDR3.5 trillion - Net debt/adjusted inventory sustained below 50% Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Net debt/adjusted inventory above 60% for a sustained period (30 September 2017: 48.7%) - Significant weakening in liquidity LIQUIDITY Satisfactory Liquidity: Structurally, the liquidity schedule looks manageable. Only modest maturities of less than IDR400 billion a year from amortising construction and development loans are due each year until 2020, when we expect the local bank market to be accommodating if cash flow do not permit deleveraging. ASRI employs corridor hedging for its US dollar bonds, which represent 85% of its debt, helping defray the foreign-currency exposure arising from a dollar-funded, rupiah-income profile. FULL LIST OF RATING ACTIONS PT Alam Sutera Realty Tbk - Long-Term Foreign-Currency IDR off RWN; affirmed at 'B'; Stable Outlook - Senior unsecured rating off RWN; affirmed at 'B' with a Recovery Rating of 'RR4' Alam Synergy Pte Ltd - Long-term rating on USD245 million 6.625% senior unsecured bond due 2022 off RWN; affirmed at 'B'/'RR4' - Long-term rating on USD235 million 6.95% senior unsecured bond due 2020 off RWN; affirmed at 'B'/'RR4' 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 +65 6796 7216 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments - ASRI reports land purchase costs under investment cash flows (capex). We have removed these costs from cash flow from investments and included them under cash flow from operations as working capital (payments made to suppliers under the direct cash flow method). The company reports land bank as a long-term asset on its balance sheet. We have classified land bank as part of current inventory given the nature of ASRI's business of land development and sales. This adjustment was also reflected in the cash flow statement. We have added back capitalised interest to EBITDA to facilitate comparison with peers. All taxation was incorporated in a single line after operating income. We have included IDR560 billion of cash in an escrow account subject to CFLD's co-signature as restricted cash as at end-2016 alongside IDR246 billion of cash held as collateral for mortgages extended to ASRI customers. The blocked cash for land purchases has also been removed from the net debt/adjusted inventory ratio's denominator to reflect that it is earmarked against future inventory. 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 Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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