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April 4 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia-based property developer PT Alam Sutera Realty Tbk's (ASRI) Long-Term Issuer Default Rating at 'B+' with a Stable Outlook. Fitch has also affirmed ASRI's senior unsecured rating, and the ratings of its outstanding US dollar notes (which are issued by Alam Synergy Pte Ltd, and guaranteed by ASRI) at 'B+', with a Recovery Rating of 'RR4'. A full list of rating actions is at the end of this commentary.
The affirmation of ASRI's ratings reflects its small scale, project concentration and the inherent cyclicality in the property development business. The rating also recognises ASRI's strong track record of presales across its major development properties, its low-cost land bank and good-quality development assets.
KEY RATING DRIVERS
Stability, Amid Softer Demand: ASRI expects to shift its focus towards the middle-market segment in 2014 in order to counter weaker buyer sentiment due to tighter regulations imposed in 2013 and Indonesia's presidential and legislative elections that will run until July 2014. The middle-market segment consists of more first-time home buyers - a segment that was less affected by the new regulations in 2013. Fitch expects this strategy and the quality of its development projects to help ASRI maintain satisfactory credit metrics through 2014. However, its presales/gross debt ratio is likely to fall towards the 0.75x threshold (end-2013: 1.05x), below which negative rating action may be considered.
Limited but Growing Diversification: ASRI's presales grew around 50% to IDR4.8trn in 2013. However they are considered small relative to higher-rated developers. Fitch notes that the company's project diversification has improved, with over 60% of its presales in 2013 stemming from outside of its main development in Serpong (2012: 18%). Nevertheless ASRI remains less diversified compared with higher-rated peers.
Established Track Record: The ratings recognise ASRI's low-cost, large land bank of over 2,200 hectares, strategic advantages of its main development locations, and track record in successful project executions. ASRI is one of the pioneers in developing large-scale townships in Serpong, which is now a popular alternative to other areas in Greater Jakarta. Fitch expects ASRI to be able to leverage on its success in Serpong for future project launches, as recently demonstrated by the higher-than-expected sales for its Pasar Kemis projects.
Currency Risk Mitigated: ASRI has a policy of hedging the foreign currency risk on the principal repayment of its US dollar borrowings. The company also targets to maintain sufficient US dollar cash reserves to cover three to four coupon payments at any given time. Fitch believes this strategy mitigates ASRI's currency risk but does not fully compensate for circumstances of extreme exchange-rate volatility.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-A sustained increase in leverage such that the presales/gross debt ratio is below 0.75x (2012: 1.5x) on a sustained basis.
-An increase in its exposure to non-core businesses
Positive rating action is not expected due to the cyclical nature of the property development business, the company's small scale and limited project diversification compared with higher-rated property developers.
FULL LIST OF RATING ACTIONS
PT Alam Sutera Realty Tbk
Long-Term, IDR affirmed at 'B+'; Outlook Stable
Senior unsecured rating affirmed at 'B+/RR4'
Outstanding USD235m 6.95% notes issued by Alam Synergy Pte Ltd and guaranteed by PT Alam Sutera Realty Tbk, due in 2020, affirmed at 'B+/RR4'
Outstanding USD225m 9% notes issued by Alam Synergy Pte Ltd and guaranteed by PT Alam Sutera Realty Tbk, due in 2019, affirmed at 'B+/RR4'