Fitch Rates Jababeka's Proposed USD Notes 'B+(EXP)'

Mon Sep 1, 2014 1:30am EDT

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(The following statement was released by the rating agency) SINGAPORE, September 01 (Fitch) Fitch Ratings has assigned Indonesia-based industrial estate developer PT Kawasan Industri Jababeka Tbk's (Jababeka; 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 Jababeka International B.V., and guaranteed by Jababeka and certain subsidiaries. Jababeka plans to use the net proceeds from the new notes mainly to redeem USD175m of notes due in 2017, 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. 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 US dollar-denominated cashflows are a natural hedge for its US dollar borrowings. As of end-2013, the recurring coverage ratio (recurring EBITDA/ interest expense) stood at about 1.3x, even though the plant utilisation rate was only 89% in 2013 due to several periods when the plant was not in operation. Fitch expects the recurring coverage ratio to improve towards end-2015 in line with better efficiency at the power plant, the implementation of an electricity buyback scheme with PLN, and a proportionate increase in recurring income in Jababeka's other infrastructure services. Limited Capex, Improved Liquidity: Jababeka has decided to postpone investment in a second power plant and will instead prioritise improving the efficiency and ensuring smooth operations at its first plant before starting work on the second. With the postponement, Jababeka is left with minimal capex, mainly for additional dry port equipment. Capex of about USD10m each in 2015 and 2016 is scalable, depending on the dry port's productivity. The deferment of the investment in the second power plant, 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. Offsetting the Cyclicality of Industrial Sales: The development of industrial estates is more cyclical than that of residential estates, with foreign direct investments (FDI) into Indonesia in 2011-12 hitting a record high before shrinking from mid-2013 due to weaker sentiment. As the growth in demand for industrial space in Indonesia slows and Jababeka's flagship Cikarang industrial estate matures, Fitch expects the sales of residential and commercial space to start to contribute meaningfully to Jababeka's total marketing sales and compensate for lower industrial sales. Fitch has observed growing demand for shophouses and middle-class housing in Jababeka's Cikarang estate since last year, and expects demand to remain strong, aided by a new exit for a toll road close by and various commercial projects underway. Long-Term Diversification Benefits: Jababeka and Singapore's Sembcorp will develop a new industrial complex in Kendal, Central Java, which is modelled after Cikarang. The relocation of labour-intensive production out of Cikarang will allow tenants 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 new estate in stages. The initial investment to acquire 300 hectares of land in Kendal was paid in 2013, and Jababeka plans to add another 350 hectares of land there in 2014. The company has no commitments for significant land acquisitions after 2014. Large, Low Cost Land Bank: Jababeka's credit profile is supported by a sizeable, mature land bank in Cikarang of about 700 hectares, equivalent to another 23 years of development. Cikarang is currently Jababeka's most mature development with established infrastructure and a captive industrial market. The expansion in Kendal will add 650 hectares of land by end-2014, or about 26 years of development. With low acquisition costs, Fitch expects Jababeka will be able to maintain its gross margin of about 50% from development sales over the medium term. 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. 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 forecast: 1.1x) - Decline in presales/ gross debt to below 0.4x on a sustained basis (2014 forecast: 0.3x). This trigger provides Fitch with a way to monitor Jababeka's development sales, which are an important support for its 'B+' rating. While Fitch expects this ratio to be below the trigger at end-2014, presales are likely to improve from 2015 as the investment climate recovers and the Kendal estate starts to contribute presales. No positive rating action is expected in the next 24 months due to project concentration and high dependence on sales of industrial space. Contacts: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Ftich Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Erlin Salim Associate Director +62 21 2988 6811 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014 are available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage 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'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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