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March 4 (The following statement was released by the rating agency)
Fitch Ratings has assigned Indonesia-based retailer PT Multipolar Tbk's (Multipolar, B+/ Stable) USD30m 9.75% notes due 2018 a final 'B+' rating. The new notes are issued by Pacific Emerald Pte. Ltd. and guaranteed by Multipolar and certain of its subsidiaries. The new notes are issued as a tap to the existing USD200m notes due in 2018 that have the same terms and conditions and maturity.
The notes are rated at the same level as Multipolar's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The rating action follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 27 February 2014.
KEY RATING DRIVERS
Structural Subordination: The ratings of Multipolar largely reflect its holding company structure and its high dependence on dividends. The ratings, however, also recognize the group's solid market position in the Indonesian retail sector, as evidenced by a continued strong 2013 performance by PT Matahari Putra Prima Tbk (MPPA, not rated), in which Multipolar owns 50.2%, and PT Matahari Department Stores Tbk (MDS, not rated), in which Multipolar holds 20.5%. Fitch expects dividends from these two companies to account for more than 50% of Multipolar's deconsolidated cash flows (funds from operations from wholly owned entities plus dividends from non-wholly owned subsidiaries) in 2014 (2013: 84%).
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 compared with other rated peers that own their retail space. In particular, MPPA's flexibility to pay dividends is restricted by its limited financial capacity as indicated by a modest funds from operations (FFO) fixed charge cover of below 2x.
Currency Mismatch Pressures: As of end-2013, about 80% Multipolar's debts were denominated in US dollars. This places pressure on the company's financial metrics because the majority of its earnings are in rupiah, which has depreciated by about 20% against the US dollar over the last 12 months. As a result, Fitch expects Multipolar's fixed charge coverage ratio (FFO from wholly owned entities plus dividends/ interest expense plus rents) to fall below 2x in 2014 (2013 estimate: 2.18x). However, Fitch expects the ratio to improve to above 2x in 2015 as Multipolar expects PT Nadya Putra Investama (NPI, not rated), a retail subsidiary, to distribute special dividends from its cash pile in 2015 and 2016. The fact that Multipolar retains a majority of its existing cash balance in US dollars also mitigates the currency volatility.
Sufficient Liquidity: Fitch expects Multipolar to be able to maintain sufficient liquidity, primarily driven by dividend flows from MPPA and MDS. As of end-2013, Multipolar and wholly owned subsidiaries held cash balances totaling over USD100m, against short-term debts of around USD24m. Fitch also believes that Multipolar will, in a distressed scenario, have access to additional liquidity by monetizing its shareholding in MPPA or MDS.
Contingent Liability: Although Multipolar gains potential benefits of heightened governance and growth targets from its strategic alliance with Singapore-based investment company Temasek Holdings (Temasek) in MPPA, the Indonesian company faces significant contingent liability under the terms of the alliance agreement. Under the agreement, if MPPA fails to meet Temasek's operating performance targets or internal rate of return requirements, Multipolar will have to pay Temasek any shortfall of its USD300m investment upon the latter's exit from MPPA. However, given the current favorable retail market outlook, the risk of this liability crystallising is, in Fitch's view, not high.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Decline in Multipolar's fixed charge coverage ratio (FFO from wholly controlled entities plus dividends/ interest expense plus rents) to below 2x 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 to above 2x on a sustained basis.