Fitch Rates Indonesia's Multipolar 'B+'; USD Bonds 'B+(EXP)'

Thu Jul 11, 2013 10:32pm EDT

(The following statement was released by the rating agency) JAKARTA/SINGAPORE/SYDNEY, July 11 (Fitch) Fitch Ratings has assigned Indonesia-based retailer PT Multipolar Tbk (MLPL) a Long-Term Issuer Default Rating (IDR) of 'B+' with Stable Outlook. The agency has also assigned MLPL a senior unsecured rating of 'B+' and its proposed senior unsecured USD notes an expected 'B+(EXP)' rating, with a Recovery Rating of 'RR4'. The proposed notes are to be issued by Pacific Emerald Pte Ltd and guaranteed by PT Multipolar Tbk and certain subsidiaries. The final rating is contingent upon receipt of documents conforming to information already received. Key Rating Drivers Structural subordination: The ratings of MLPL largely reflect its holding company structure and its high dependence on dividends. The ratings, however, also recognise the group's solid market position in the Indonesian retail sector which is supported by favorable macroeconomic conditions. MLPL's holding company structure means that its cashflows are structurally subordinated to the obligations of its operating subsidiaries, in particular PT Matahari Putra Prima Tbk (MPPA) and PT Matahari Department Store Tbk (MDS), which together represent more than 50% of MLPL's cashflows. As such, MLPL's capacity to meet its debt obligations is therefore contingent upon MPPA's and MDS's ability to continue distributing dividends. High fixed costs: Notwithstanding MPPA's and MDS's strong cash-generating ability and their moderate leverage, their strategy to lease retail space exposes both companies to the risk of rising rental expenses and results in weaker credit metrics than other rated peers with a self-owned property strategy. Hence in Fitch's view MPPA's flexibility to upstream dividends is therefore restricted by its limited financial flexibility as indicated by a modest fund from operations (FFO) fixed charge cover of below 2x. Sufficient liquidity: Fitch expects MLPL will be able to maintain a sufficient liquidity profile, driven by wholly-owned subsidiaries' earnings stability and consistent dividends flows from MPPA and MDS. Fitch believes that MLPL will, in a distressed scenario, have access to additional liquidity by monetising its shareholding in MPPA or MDS. Strong market position: The ratings also factor in MPPA's and MDS's extensive networks, strong market position, an established TMT portfolio, and continued robust domestic consumption supporting short-to-medium term growth. The ratings also take into account diversification benefits from the non-retail business, which contribute a substantial 30% of MLPL's cashflow. Contingent liabilities: Although Fitch recognises the potential benefits from the strategic alliance with Temasek in MPPA of heightened governance and growth targets, MLPL faces significant contingent liability under the Exchange Rights Subscription Agreement should MPPA not meet Temasek's operating performance targets or internal rate of return requirements. Under the agreement, MLPL will make up any shortfall of Temasek's USD300m investment upon the latter exiting MPPA. However, given the current favorable retail market outlook, the risk of this liability crystalising is, in Fitch's view, not high. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Decline in MLPL's fixed charge coverage ratio (FFO from wholly controlled entities plus dividends/ interest expense plus rents) to below 2x (2013 forecast: 2.9x) on a sustained basis. - Weakening of MPPA's financial profile - Inability to secure long-term funding Positive rating action is not expected unless there is substantial improvement in MPPA's financial profile, including a rise in MPPA's fixed charge coverage of above 2x on a sustained basis. MPPA is an important earnings contributor to MLPL. Contact: Primary Analyst Shahim Zubair, CFA Associate Director +65 67967227 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Erlin Salim Associate Director +62 21 29026410 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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