RPT-Fitch rates Modernland's USD bonds 'B(EXP)', affirms IDR
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Oct 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Indonesia-based PT Modernland Realty Tbk's (Modernland) proposed senior unsecured US dollar notes due in 2016 an expected rating of 'B(EXP)' with Recovery Rating of 'RR4'. Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) at 'B' with Stable Outlook.
The proposed notes are to be issued by Modernland Overseas Pte Ltd and guaranteed by Modernland and its wholly owned subsidiaries. The final rating is contingent upon receipt of documents conforming to information already received. Proceeds from the notes will be used to acquire 51% of the Jakarta Garden City project from Keppel Land (Keppel, unrated). Due to the long-term payback nature of the acquisition, Fitch expects Modernland will be able to refinance the notes when they are due in 2016.
KEY RATING DRIVERS
Limited Recurring Income: Modernland's limited recurring revenue differentiates it from higher rated global peers. Recurring revenue is derived from estate management fees and newly opened hotel operations. However, these segments contribute less than 10% of annual EBITDA. Fitch views Modernland's small recurring revenue base as the main constraint on its ratings, particularly given the cyclical nature of the property development sector.
Execution Risks: Jakarta Garden City's strategic locations, established infrastructure, affordability compared with other properties in the Kelapa Gading district, in northern Jakarta, underpin Modernland's business growth prospects. The project is currently a joint venture with Keppel and both parties have agreed on Modernland acquiring Keppel's 51% share in the project. However, in Fitch's view, Modernland has yet to demonstrate a track record of strong presales without Keppel's support.
Similar risks are also present in Modernland's longer-term expansion plan in Bekasi, an important satellite city about 16 km from Jakarta, where success is contingent upon the timely execution of accompanying infrastructure and the company's ability to build critical mass.
Project Diversification: The ratings also reflect Modernland's sizable landbank, which is diversified by location and evenly balanced between industrial and residential use. Over the next 18 months, cashflows will be driven by presales from residential estate Jakarta Garden City and industrial estate Modern Cikande. Over the longer term, the company will also look to launch its second industrial estate in Bekasi.
Cash Buffer from ASRI: Cashflows from land sales to PT Alam Sutera Realty Tbk (ASRI, B+/Stable) mitigate the execution risks by providing sufficient liquidity. Modernland expects to receive IDR3.4trn over the next 30 months after selling 170 hectares of land in Serpong, Tangerang, which is close to Jakarta and near ASRI's existing residential estate. Proceeds will be used mostly to buy land in Bekasi, which will enable Modernland to replenish land inventory for sustainable presales and cashflows.
Modernland's low acquisition cost of about USD20 per square metre for 489 hectares of land in Bekasi is an additional comfort and reduces project execution risks.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Decline in presales/ gross debt ratio to below 30% (2013: Fitch forecast at 30%) on a sustained basis
- Net debt/net inventory remaining above 1x after 2015 (2013: Fitch forecast 1.4x), possibly resulting from delayed project execution or weaker pre-sales. Positive rating action is not expected unless Modernland demonstrates a track record in timely project execution, leading to improved scale and project diversification, or improved recurring income.
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