Fitch Assigns Pakuwon's USD250m Notes 'BB-' Final Rating
(The following statement was released by the rating agency) SINGAPORE/JAKARTA, February 13 (Fitch) Fitch Ratings has assigned Indonesia-based property developer PT Pakuwon Jati Tbk's (Pakuwon, BB-/Stable) USD250m 5% senior unsecured notes due in 2024 a final rating of 'BB-'. The notes will be issued by Pakuwon's wholly owned subsidiary Pakuwon Prima Pte Ltd, and guaranteed by Pakuwon and certain subsidiaries. Pakuwon intends to use the net proceeds of the proposed notes to redeem its existing USD200m 7.125% senior unsecured notes, which are due in 2019, and for general corporate purposes. Fitch expects Pakuwon's financial profile to remain within the parameters of its 'BB-' Long-Term Issuer Default Rating as the new notes will be used mainly for refinancing and to extend the maturity profile of the company's debt, allowing more flexibility to manage cash flows. The final rating follows the receipt of documents conforming to the information already received and is in line with the expected rating assigned on 6 February 2017. The notes are rated at the same level as Pakuwon's senior unsecured rating as they represent the company's unconditional, unsecured and unsubordinated obligations. KEY RATING DRIVERS Solid Investment Property Portfolio: Pakuwon's ratings reflect its strong investment property (IP) portfolio, which is driven mainly by its mall operations and generated around 80% of its total recurring revenue in 2015. Pakuwon's malls have an average occupancy rate of over 90%, and have lease expiry profiles of over five years on average, with most of the leases on a fixed-rent basis. Fitch expects Pakuwon's recurring EBITDA/interest coverage ratio to remain above 2x and for recurring EBITDA to comfortably cover loan amortisation and dividend payments in 2016-2018. More Volatile Development Business: Pakuwon also has significant exposure to development properties, where cash flows are inherently cyclical and more volatile. Pakuwon reported contracted sales of IDR1.6trn in 9M16, down by 36% yoy, and accounting for about 75% of management's 2016 contracted sales forecast. Pakuwon's IP portfolio moderates this exposure; recurring income from the IP portfolio contributed around 50% of total cash inflow in the past three years. Pakuwon also benefits from its market leadership in Surabaya and its ability to create value from its large integrated mixed-use developments, despite being a smaller developer than its similarly rated peers. Limited Scale and Diversification: Pakuwon's rating also reflects its relatively small development property scale and limited project diversification compared with higher-rated international peers. Pakuwon's current land bank of around 450 hectares still allows for over 10 years of development, but the relatively low number of projects, modest contracted sales and lack of geographical diversification will remain a constraining factor for the medium term. Conservative Financial Policy, Leverage: Pakuwon has maintained a conservative financial profile and has a record of low leverage. The company has managed to keep its leverage (net debt/adjusted inventory ratio) below 30% over the past three years and Fitch expects its leverage to fall to around 20% by 2018, as demand and the cash-collection cycle improve. Fitch believes Pakuwon's leverage remains appropriate for its 'BB-' rating. Manageable US Dollar Exposure: Fitch believes Pakuwon's solid recurring EBITDA generation provides a comfortable buffer against depreciation of the Indonesian rupiah versus the US dollar. Fitch estimates that Pakuwon's recurring EBITDA/interest coverage ratio will remain above 2x should the rupiah depreciate to 15,000 per dollar, all else remaining equal. Furthermore, Pakuwon has hedged the principal of its US dollar bond against depreciation of the rupiah using a number of call spread agreements, with an overall upper-lower strike range of 13,000-17,500 per dollar. DERIVATION SUMMARY Pakuwon's rating is well-positioned relative to other Fitch-rated property developers, such as PT Bumi Serpong Damai Tbk (BSD, BB-/Stable), and PT Lippo Karawaci Tbk (Lippo, BB-/Stable). Fitch believes that BSD's larger property development scale and larger land bank relative to Pakuwon is compensated for by the latter's higher recurring EBITDA interest coverage. Lippo has high leverage but greater financing flexibility, whereas Pakuwon has lower leverage and higher recurring EBITDA interest coverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Contracted sales of around IDR2trn in 2017 - Recurring EBITDA margin of around 55% in 2017 - Average IP rental charge growth of around 5% yoy in 2017 and 2018 - Construction capex of around IDR2trn in 2017 RATING SENSITIVITIES We do not foresee positive rating action in the next two years. However, an upgrade might be considered if the IP assets increase to above USD1bn and its top-three IP assets generate less than 60% of recurring revenue (2015: 78.2%). Developments that may, individually or collectively, lead to negative rating action include: - Sustained deterioration in the ratio of recurring EBITDA from investment properties to interest to below 2.0x (2016F: 2.5x) - Net debt/adjusted inventory (adjusted inventory defined as investment properties + inventory + landbank + advances for land acquisitions - advances from customers) rising above 35% on a sustained basis (2016F: 26%) - Weakening of the business profile that would be reflected in a significant rise in vacancy rates or a sustained fall in rentals - Share of cash flows generated from investment property falls to less than 40% (2016F: 53%) LIQUIDITY As of September 2016, Pakuwon had cash balance of IDR2.3trn and unused credit facilities of around IDR1.5trn, which are adequate to cover outstanding short-term debt of IDR700bn, forecast construction capex of IDR1.7trn in 2017 and planned land acquisition capex of IDR250bn in 2017, part of which is discretionary. There is also flexibility around the forecasted construction capex as it is partly driven by the level of new properties sold during the year. Contact: Primary Analyst Hasira De Silva, CFA Director +65 67967240 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Bernard Kie Analyst +62 21 2988 6815 PT Fitch Ratings Indonesia DBS Bank Tower Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 9 June 2016 Summary of Financial Statement Adjustments - Fitch includes movements in advance payments from customers and land as well as advances made for land purchases under working capital changes. Fitch also adds amortised costs of debt back to total debt outstanding. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com. 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