OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Greenwood Sejahtera Tbk's (Greenwood) National Long-Term Rating at 'BBB+(idn)' with Stable Outlook. The agency has also affirmed the 'BBB+(idn)' rating on Greenwood's senior unsecured IDR1.5trn bond programme and IDR72bn bond issued under the programme.

'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Weak Presales; Deferred Expansion: The commercial property developer's presale performance over the past 12-18 months has been weak, with IDR42bn of presales in 2015 and IDR60bn during 9M16 (2014: IDR239bn). This was due to a poor domestic macroeconomic environment and a government crackdown on tax evasion over the past two years that has left buyers cautious. We expect presales to remain weak in 2016, but increase in 2017 as the construction of Greenwood's Capital Square project in Surabaya gains traction.

The 1 July 2016 implementation of a tax amnesty in Indonesia may boost property demand, but Greenwood's overall credit profile is not likely to benefit in the short - term due to its significant exposure to office space and the early construction phase of its Capital Square project.

Rising Leverage; Sufficient Cash Flow: We expect Greenwood's leverage to increase over 2016-2018, as it accumulates debt to finance the construction of its projects. Nevertheless, the developer's rating is supported by recurring cash flow from dividends and mature asset portfolio income. This compensates for low development sales due to muted demand for office space and middle - and upper-range residential projects over the past 12-18 months. We expect Greenwood to maintain recurring interest coverage of above 1x in 2016-2018.

Small Scale, High Development Risk: Greenwood's rating reflects its small development scale over the short - to medium-term. Limited project diversification renders the developer's cash flows more vulnerable to economic downturns than for township developers with large and low-cost land banks. Fitch believes there is high execution risk as Greenwood is expanding into new areas and cities. However, we believe its high development margins, sufficient recurring income and flexible capex are important mitigating factors.

Financing Flexibility: The rating reflects Greenwood's relationship with its ultimate shareholder. Fitch believes the relationship improves the developer's access to funding, which would otherwise be difficult or costly due to Greenwood's small scale and limited record in the property development business.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Presales of around IDR70bn in 2016 and around IDR420bn in 2017

- Capital Square construction completed in 2019

RATING SENSITIVITIES

Negative: developments that may, individually or collectively, lead to negative rating action include:

- liquidity pressure, which could be indicated by insufficient cash to cover short-term debt

- lower-than-Fitch-expected sales, so presales/gross debt remains below 30% on a sustained basis (2016 Fitch forecast: 31%).

Positive rating action is not expected over medium term due to Greenwood's small development scale and high development risks.

LIQUIDITY

Sufficient Liquidity: Greenwood had a cash balance of IDR78bn as of 30 June 2016, short-term debt of IDR19bn and an unused term loan facility of around IDR357bn, which can be used for the construction of the Capital Square project. Greenwood can also issue IDR1.4trn of bonds under its IDR1.5trn bond programme. The company has also attained shareholder approval to conduct a rights issue in 2017. These, coupled with the developer's recurring income and flexibility in the timing of project launches, allows it to accumulate cash buffers and strengthen its liquidity profile.