Fitch Assigns Modernland's USD57m Notes 'B' Final Rating
The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 18 August 2016.
The notes are rated at the same level as Modernland's senior unsecured rating, as they represent unconditional, unsecured and unsubordinated obligations of the company. The notes form a part of the same series as the existing USD191m 9.75% senior unsecured notes due in 2019, which are also rated 'B'. Modernland expects to use the proceeds to refinance its outstanding USD57m 11% senior unsecured notes, which are due on 25 October 2016.
The Negative Outlook on Modernland's Long-Term Issuer Default Rating (IDR) reflects the risk that the company could breach a number of its local-currency debt covenants in 2017, as EBITDA may remain weak unless presales improve in the next six to 12 months. Modernland may not be able to achieve its presales target for 2016 due to the slow domestic macroeconomic environment and its dependence on cyclical industrial land sales, which may put a strain on its cash collection. The IDR was affirmed at 'B' as the company may take measures to improve the recognition of EBITDA or obtain waivers on covenant breaches.
KEY RATING DRIVERS
Weak Presales; Covenant Breach: Modernland's 1H16 presales fell 80% yoy to IDR404bn, which accounted for around 10% of its 2016 target. The decline was driven by slow economic growth and the government's crackdown on tax evasion, which has left buyers cautious. Fitch forecasts this may lead to Modernland breaching a number of its local-currency debt covenants in 2017, as EBITDA declines following the weakness in presales.
The implementation of a tax amnesty in Indonesia on 1 July may boost demand for property, although Modernland's overall credit profile is not likely to benefit in the short term given the potential surge in new property launches in the market once the amnesty takes effect and Modernland's major exposure towards the industrial segment.
Volatile Industrial Cash Flows: Modernland's exposure to industrial land sales results in more volatile cash flows than peers that depend on residential sales. Nevertheless, this remains an important contributor to Modernland's cash flows, and the volatility is mitigated by the low development risks of the industrial segment.
Modernland has a good 20-year track record in developing industrial estates, and has built strong relationships with tenants. Its flagship Cikande industrial estate has a very low average land cost compared with the current average selling price (ASP) of around IDR1.5m per square metre (sqm), and Modernland has sufficient land to continue developing there for around five years, assuming no further land acquisitions. Fitch believes Modernland can build on its success in Cikande and use a similar business model for future developments in Bekasi.
Limited Residential Track Record: Fitch expects Modernland's residential and commercial segment to account for more than 60% of presales by 2018, driven by the Jakarta Garden City (JGC) project and the new launches in Bekasi. The growing proportion of residential sales will counterbalance volatility in industrial land sales, but Modernland's track record in developing an integrated, large-scale residential project is still limited relative to the other rated developers.
ASRI Land Sales Delayed: Fitch expects cash collection from land sales to PT Alam Sutera Realty Tbk (ASRI, B+/Negative) to lag behind management's expectation. Fitch's rating case assumes the majority of the proceeds that was expected to be received this year will be delayed to 2017, mainly due to ASRI's weak presales. Nevertheless, Modernland believes ASRI remains committed to completing the acquisition, given the strategic location of the land and the low acquisition price compared with the current market price in the area.
Manageable Forex Risk: Modernland has entered into a few call-spread options to fully hedge the principal of its USD191m bond due 2019, covering rupiah depreciation of up to IDR15,500 per US dollar. The company has also entered into a similar hedging arrangement for its USD57m outstanding bond due 2016, covering rupiah depreciation of up to IDR14,000 per US dollar. In addition, Fitch believes that Modernland's thick margins are sufficient to absorb short-term currency volatility.
Fitch's key assumptions within our rating case for the issuer include:
- Presales (excluding one-off sales) of IDR1.5trn and IDR3.6trn in 2016 and 2017, respectively
- Average ASP growth of 5%-10% year on year
- Land acquisition capex of IDR825bn and IDR743bn in 2016 and 2017, respectively
- Majority of ASRI's land sale proceeds to be delayed to 2017
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- If the company fails to achieve its 2016 presales target and there is heightened risk it may breach covenants on its local-currency debt, or the company fails to negotiate waivers on covenant breaches
- Presales/ gross debt sustained at less than 40% (2016F: 77%)
Positive: Future developments that may, individually or collectively, lead the Outlook to be revised back to Stable include:
- The company achieves its 2016 presales target and the risk of it breaching its local-currency debt covenants is reduced, or the company successfully manages to negotiate waivers on covenant breaches