OREANDA-NEWS. Fitch Ratings has assigned Indonesia-based industrial estate developer PT Kawasan Industri Jababeka Tbk's (Jababeka; B+/Stable) proposed US dollar notes of up to USD70m an expected 'B+(EXP)' rating with a Recovery Rating of 'RR4'. The notes will be issued by wholly owned subsidiary Jababeka International B.V., and guaranteed by Jababeka and certain subsidiaries. The new notes will be consolidated and form a single series with the USD190m 7.5% Notes due in 2019.

Jababeka plans to use the net proceeds from the new notes to repay the remaining 2017 notes plus accrued interest and applicable redemption premium totaling USD46.1m, and for general corporate purposes. In Fitch's view, Jababeka's financial profile will remain unchanged and consistent with its ratings because the new notes will be used mainly for refinancing that will lower its cost of debt and extend debt maturity profile.

The notes are rated at the same level as Jababeka's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The final rating is contingent upon the receipt of documents conforming to information already received.

KEY RATING DRIVERS

Solid Interest Coverage: Jababeka's rating reflects strong interest coverage from the recurring income that comes from its 130MW power plant. The plant is critical to Jababeka's overall profile because its long-term power purchase agreement (PPA) with state electricity company PT Perusahaan Listrik Negara (PLN; BBB-/Stable) provides good earnings visibility and the U.S. dollar-denominated cash flows are a natural hedge for its U.S. dollar borrowings. As of end-2014, the recurring coverage ratio (recurring EBITDA/ interest expense) stood at about 1.2x. Fitch expects the recurring coverage ratio to improve slightly towards end-2015 in line with more efficient funding costs and a proportionate increase in recurring income in Jababeka's other infrastructure services.

Limited Capex, Manageable Liquidity: Jababeka plans to develop a second power plant, but will proceed only when it obtains a PPA with PLN. Excluding capex for the second power plant, Jababeka's maintenance capex is relatively low at about USD10m each in 2015 and 2016. This is mainly for dry port equipment, which is scalable depending on the dry port's productivity. The discretionary nature of the company's land acquisitions and its well-distributed debt maturity will allow Jababeka to accumulate cash and strengthen its liquidity profile.

Presales Target Challenging: Fitch expects 2015 to continue to be challenging for property developers because of modest economic growth, and particularly for industrial estate developers, lower foreign direct investment (FDI) flows than previous years. In Fitch's view, Jababeka's large, low-cost land bank supports its healthy margins, which will moderate the impact from lower presales and help the company to maintain sufficient liquidity.

Longer Working Capital Cycle: Fitch expects Jababeka's working capital cycle to lengthen as the proportion of residential property sales increases - a result of weaker demand for industrial land. The cash collection cycle for residential sales is longer than that for industrial sales because developers usually offer payment plans with longer repayment terms to attract buyers. However, Fitch believes risk is mitigated by the fact that Jababeka already owns land inventory to continue presales in its flagship Cikarang estate over the medium term, and because the typical 30% down payment should suffice to fund construction.

Long-Term Diversification Benefits: Jababeka and Singapore's Sembcorp are developing a new industrial complex in Kendal, Central Java, which is modelled after the Cikarang estate. Tenants relocating labour-intensive production out of Cikarang will be able to take advantage of the much lower minimum wage in Central Java. Upon successful execution, Kendal will provide Jababeka with diversification benefits and a new base for future growth. Fitch believes execution risk for this project is manageable because Jababeka typically will use proceeds from presales to develop a new estate in stages. Jababeka is aiming to launch presales in Kendal in in 2015 and is targeting around IDR250bn in presales in the same year.

Project Concentration and Cyclicality: Jababeka's rating is primarily constrained by concentration risk and high exposure to the industrial estate development business. Cikarang will continue to contribute over 80% in marketing sales in the next 24 months, with industrial space in the estate accounting for more than 60% of marketing sales. The remainder of marketing sales will stem from its Kendal estate, as well as residential and commercial sales in Cikarang.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Cikarang industrial sales volume of 250,000 sqm in 2015 and 2016
- Kendal industrial sales volume of 125,000 sqm in 2015 and 250,000 sqm in 2016
- Its power plant operates at around 90% utilisation rate

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Decline in recurring EBITDA/ interest expense to below 1x on a sustained basis (2014: 1.2x)
- Decline in presales/ gross debt to below 40% on a sustained basis (2014: 38%). This trigger provides Fitch with a way to monitor Jababeka's development sales, which are an important support for its 'B+' rating.

No positive rating action is expected in the next 24 months due to project concentration and high dependence on sales of industrial space.