October 3, 2016 / 1:57 AM / a year ago

Fitch Assigns Jababeka's USD186m Notes 'B+' Final Rating

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, October 02 (Fitch) Fitch Ratings has assigned Indonesia-based PT Kawasan Industri Jababeka Tbk's (Jababeka, B+/A(idn)/Stable) USD186m 6.5% senior unsecured notes due in 2023 a final rating of 'B+' with a Recovery Rating of 'RR4'. The notes are issued by Jababeka's wholly owned subsidiary, Jababeka International B.V., and guaranteed by Jababeka and certain subsidiaries. The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 13 September 2016. The new 2023 notes will primarily be used to exchange Jababeka's existing USD260m 7.5% notes maturing in 2019 to extend the maturity profile of the company's debt and the new money from the exchange offer is intended for general corporate purposes. Jababeka sought consent of the 2019 note holders who participated in the exchange for the removal of substantially all the restrictive covenants, all reporting requirements and certain events of default in the residual 2019 notes. Fitch believes the exchange and removal of restrictive covenants will not affect surviving 2019 bondholders and the 2023 notes include all the restrictive covenants Jababeka sought to remove from the 2019 notes. The surviving 2019 bondholders will also continue to benefit from the cross-acceleration clause in the 2019 notes. Fitch deems Jababeka's financial profile as unchanged and consistent with its ratings, as the new notes allow more flexibility to cash flow management. The notes are rated at the same level as Jababeka's senior unsecured debt rating, as they represent the company's unconditional, unsecured and unsubordinated obligations. KEY RATING DRIVERS Weak Start; Presales Improving: Jababeka reported a slight 1% decline in its presales in 2015, to IDR1trn, due to weaker sales in its industrial segment. Demand remained weak in 1Q16, but improved significantly in 2Q16, with presales increasing by 88% yoy. Fitch expects the recovery to be sustained and forecasts Jababeka to book presales of IDR1.2trn in 2016 and IDR1.5trn in 2017. Solid Recurring Coverage: Jababeka's rating reflects strong recurring interest coverage from its 130 megawatt power plant (PP1), which is operated under a 20-year power purchase agreement with the state electricity company, PT Perusahaan Listrik Negara (Persero) (BBB-/Stable). This business provides earnings visibility and a natural hedge for Jababeka's US dollar-denominated borrowings, as it operates under a cost pass-through mechanism and revenues are pegged to US dollars. Fitch expects Jababeka's recurring interest cover to temporarily decline in 2016 because of leakage in PP1. The company says permanent repairs have been completed and all machinery is operating at the same capacity and efficiency as before the leakage. Fitch expects Jababeka's recurring interest cover to be 0.8x in 2016 and 1.3x in 2017. Flexible Capex: Jababeka's capex for the next few years will be limited to developing its infrastructure facilities and increasing the efficiency of PP1. This, coupled with the discretionary nature of land acquisitions, allows Jababeka to accumulate cash buffers and strengthen its liquidity profile. However, this could change markedly should the company decide to proceed with investment in a second power plant. Growing Residential, Commercial Property Segment: Jababeka's residential and commercial property business accounted for 55% of total marketing sales in 2015, compared with 14% in 2011. There is increasing demand in this segment and Fitch expects it to remain robust, due to the strategic location of the company's Cikarang estate in West Java and rising need for homes for the additional industrial workers in the area. Long-Term Diversification Benefits: Jababeka, together with Singapore's Sembcorp, is developing a new industrial complex in Kendal, Central Java, which is modelled after Cikarang. Relocating labour-intensive production out from Cikarang makes sense in the long-run due to the lower minimum wage in Central Java. Kendal will provide Jababeka with diversification benefits and traction for future growth upon successful execution. Project Concentration and Forex Risks: Jababeka's rating is primarily constrained by the high concentration of its business in Cikarang, which Fitch expects to account for 70%-80% of presales in the next two to three years. Fitch believes concentration risk will gradually decrease as contribution from the Kendal estate grows. Jababeka hedged USD200m out of its USD260m bonds at various upper strike prices as at June 2016, the highest of which is at IDR15,000 to USD1. We believe risk is manageable, even though the company is still exposed to currency fluctuations, as there are no immediate liquidity concerns since the notes are due only in 2019 and its interest expenses are sufficiently covered by its recurring income stream. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Jababeka include: - presales of IDR1.2trn in 2016 and IDR1.5trn in 2017 - land acquisition capex of IDR400bn-500bn in 2016-2017 - construction capex of IDR400bn-500bn in 2016-2017 RATING SENSITIVITIES Positive rating action is not expected due to the company's limited project scale and exposure to the highly cyclical industrial development business. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - recurring-EBITDA/interest-expense at less than 1x for the IDR, or less than 1.2x for the National Long-Term Rating, on a sustained basis (2016F: 0.8x) - presales/gross-debt at less than 40% on a sustained basis (2016F: 35%) - net-debt/net-inventory at more than 60% on a sustained basis (2016F: 48%) Contact: Primary Analysts Hasira De Silva, CFA (International Ratings) Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Bernard Kie (National Rating) Analyst +62 21 2988 6815 PT Fitch Ratings Indonesia DBS Bank Tower Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Secondary Analyst Bernard Kie Analyst +62 21 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 18 August 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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