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Fitch Upgrades Ciputra Residence to 'A+(idn)'; Outlook Stable
September 4, 2017 / 7:43 AM / 3 months ago

Fitch Upgrades Ciputra Residence to 'A+(idn)'; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, September 04 (Fitch) Fitch Ratings Indonesia has upgraded PT Ciputra Residence's National Long-Term Rating and senior unsecured rating to 'A+(idn)' from 'A-(idn)'. The Outlook on the National Long-Term Rating is Stable. At the same time, the agency has upgraded the National Rating of the company's IDR300 billion outstanding bonds that have a 20% partial credit guarantee from the International Finance Corporation to 'AA-(idn)' from 'A(idn)'. The upgrades follow Fitch's reassessment of the linkage between Ciputra Residence and its 99.99% shareholder PT Ciputra Development Tbk due to a change of rating approach. Fitch now analyses Ciputra Development and its subsidiaries as a single economic entity because we believe the legal and operational linkages between the entities are strong. We have therefore based Ciputra Residence's rating on Ciputra Development's consolidated profile. 'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Rating Equalised to Consolidated Profile: Fitch analyses Ciputra Development and its subsidiaries, including Ciputra Residence, as a single economic entity. The strong legal and operational linkages have led us to base Ciputra Residence's National Long-Term Rating on its parent's consolidated profile. Such linkages stem from commonality in shareholding and board structure among the group companies, which Fitch believes afford Ciputra Development strong control of its subsidiaries. We are therefore treating the two entities as if they operate as a single entity. Diversified Portfolio, Solid Recurring Business: Ciputra Development is one of Indonesia's most diversified property developers by product, geography and segmentation. The company has 56 residential projects and 19 commercial properties, which include malls, hotels and hospitals in more than 30 Indonesian cities. Its commercial property business also provides strong debt service visibility given robust recurring coverage ratios, as measured by Fitch-expected revenue/net interest, of 3.8x in 2017. Large Land Bank Inventory: Ciputra Development's land bank totals around 1,400 hectares, making it one of the largest portfolios owned by developers in Indonesia. Its land bank is also well-spread geographically throughout the country. This bodes well for the company's credit profile, as it ensures project longevity, especially during the current high land-price environment. Strong Joint Development Record: Apart from its wholly owned projects, Ciputra group's strategy includes joint developments with land owners on a profit/revenue sharing scheme. This helps the group expand its operational scale with a lower balance sheet burden. However, this strategy does not provide Ciputra Development with full claims on project cash flows. Hence, we have adjusted the consolidated profile to the extent that is attributable to the company by way of its stake in the projects. Worsening Standalone Metrics: Ciputra Residence had weak 1H17 presales of IDR822 billion, just 32% of our aggregate full-year target of IDR2.6 trillion, due to slow property-sector demand. This stems from buyer caution due to prevalent political instability and aggressive taxation drive. As a result, we have lowered our presale forecast, which has weakened the company's standalone credit metrics. One-Notch Uplift from Guarantee: The rating assigned to Ciputra Residence's bond is based on a partial credit guarantee for 20% of the principal amount offered by the International Finance Corporation. The partial guarantee reduces the loss severity in case of default, raising the issuance's rating by one notch above Ciputra Residence's rating. Phase 1 (IDR200 billion) of the bond was repaid in 1H17. We are still applying the uplift to the IDR300 billion outstanding, as the partial guarantee remains intact. DERIVATION SUMMARY Fitch believes the consolidated profile of Ciputra Development compares well with national peers, such as PT Lippo Karawaci Tbk (A+(idn)/Stable) and PT Kawasan Industri Jababeka Tbk (KIJA, A(idn)/Stable). Ciputra Development's operating scale is smaller relative to Lippo, but its lower leverage, superior presale turnover and higher recurring cover compensates. Ciputra Development's superior leverage, presale turnover and recurring cover also warrant a one-notch difference to KIJA's rating. KEY ASSUMPTIONS Fitch's key assumptions for the consolidated profile include: - Revenue recognition: houses - 20%-25% in year two, 50% in year three and the remainder in year four; apartments -25% over years one to four - Cash collection over five years - Ciputra Development's attributable presales to amount to IDR5.4 trillion in 2017 and IDR6 trillion in 2018. - Ciputra Development's capex, excluding land acquisition, to peak at IDR1.1 trillion-1.2 trillion annually in 2017-2018 RATING SENSITIVITIES Developments that could, individually or collectively, lead to positive rating action include: - Attributable presales reaching a minimum of IDR7 trillion on a sustained basis - 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 - Leverage, as measured by net debt/adjusted inventory, sustained below 30% (2016: 21%) Developments that could, individually or collectively, lead to negative rating action include: - Recurring revenue/net interest expense falling below 3.0x (2016: 3.9x) for a sustained period - Leverage, as measured by net debt/adjusted inventory, rising above 40% for a sustained period - Weakening in legal and operational ties between the parent and operational subsidiaries LIQUIDITY Liquidity Adequate: Ciputra Development should have sufficient liquidity on a consolidated basis to meeting maturities due. Liquidity has tightened due to several projects allowing for longer-tenor instalments and is set to tighter further with a SGD48 million medium-term note in 2018. Nonetheless, it still has IDR7 trillion in unused facilities, sufficient to meet maturities due of under IDR1 trillion by end-2017. Contact: Primary Analyst Robin Sutanto Analyst +62 21 2988 6811 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments: Fitch includes movements in advance payments from customers, land for development as well as advances made for land purchases under working capital changes. Fitch also adds amortised cost of debt back to total debt outstanding. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Third-Party Partial Credit Guarantees Rating Criteria (pub. 06 Jul 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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