RPT-Fitch Rates Modernland Realty's Proposed USD Notes 'B(EXP)'

Mon Jul 14, 2014 6:52am EDT

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July 14 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Indonesia-based property developer PT Modernland Realty Tbk's (Modernland; B/Stable) proposed US dollar notes due in 2019 an expected 'B(EXP)' rating with a Recovery Rating of 'RR4'. The notes will be issued by wholly owned subsidiary Marquee Land Pte. Ltd, and guaranteed by Modernland and certain subsidiaries. Modernland plans to use the net proceeds from the new notes to redeem USD150m of notes due in 2016, repay debt and for general corporate purposes.

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

KEY RATING DRIVERS

Limited Recurring Income: Modernland's rating reflects its limited recurring revenue, which differentiates it from higher rated global peers. The company derives recurring revenue from estate management fees and newly opened hotel operations, but these segments account for less than 10% of annual EBITDA. Modernland's small recurring revenue base is the main constraint on its ratings, particularly given the cyclicality of the property development sector.

Moderating Execution Risks: Jakarta Garden City's (JGC) strategic location, established infrastructure, affordability compared with other properties in the Kelapa Gading district, in northern Jakarta, underpin Modernland's business growth prospects. There is execution risk with Modernland taking over this project from Keppel Land. However, Fitch believes the risk has moderated, as evidenced by Modernland's successful new launch following the acquisition. The 200 new units it launched in May 2014 have all been sold. Aeon's new mall in JGC, which will be in operation by end-2015, will be important in attracting potential buyers in future launches.

Nevertheless, high execution risks remain for Modernland's longer-term expansion plan in Bekasi, an important satellite city about 16 km from Jakarta. Success of this project 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 sizeable landbank, which is diversified by location and evenly balanced between industrial and residential use. Over the next 18 months, cashflows will be primarily driven by presales from residential estate JGC 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. In 2014, Modernland expects to receive IDR900bn from land sales to ASRI. In the year to May 2014, company has received IDR400bn.

Modernland's liquidity profile is also supported by its discretion over land acquisition and the minimal capex required for the company to generate cashflows from its major projects in JGC and Cikande. This is because both projects already have established infrastructure.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Decline in presales/ gross debt ratio to below 30% (2013: 55%) on a sustained basis

- Net debt/net inventory above 1x (2013: 59%) on a sustained basis, possibly resulting from delays in project execution or weaker-than-expected pre-sales.

Positive rating action is not expected unless Modernland demonstrates a track record of timely project execution, leading to improved scale and project diversification, or a significant improvement in recurring income.

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