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June 30 (The following statement was released by the rating agency)
Fitch Ratings has assigned PT Pakuwon Jati Tbk's (Pakuwon, B+/Stable) USD168m 7.125% senior unsecured notes due 2019 a final 'B+' rating, with a Recovery Rating of 'RR4'. The new notes are issued by Pakuwon Prima Pte Ltd and guaranteed by Pakuwon and certain subsidiaries. The notes are rated at the same level as Pakuwon'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 19 June 2014.
KEY RATING DRIVERS
Support from Investment Property Portfolio: Pakuwon is a diversified real estate developer based in Indonesia. The company's property portfolio includes retail, residential, commercial and hospitality developments. Its ratings reflect its solid investment properties, which contributed 48% of total revenue in 2013. Furthermore, 42% of the revenue was derived from its shopping mall and office leasing operations which have a long-term lease profile.
These investment properties generated solid recurring EBITDA of IDR778bn (USD67m) and recurring EBITDA/interest coverage of 3.8x, which along with the company's strong liquidity position will help it manage any cyclicality and volatility of property development.
Quality Assets: The company's investment portfolio is spread across four well established and strategically located prime locations in Jakarta and Surabaya. The main projects comprise of mixed use high rise developments (apartments, office, retail, and sometimes hotel). Pakuwon's malls, while providing stable recurring revenue, anchor each of its land banks in Jakarta and Surabaya, thereby attracting residents and office tenants while servicing as focal points for local communities. The company has a strong track record of managing its lease retail occupancy, and consistently achieves above industry average occupancy.
Higher Margin than Peers: Fitch expects Pakuwon to generate EBITDA margin above 50% in the medium term, supported by a low cost land bank and the company's ability to create value in its superblocks. Pakuwon posted EBITDA margin of 56% in 2013 (2012: 55.6%), higher than other rated developers such as PT Alam Sutera Realty Tbk (B+/Stable) with 42% and PT Lippo Karawaci Tbk (BB-/Stable) with 27%. Fitch believes that such a high margin will provide some pricing flexibility during a downturn in the property cycle.
Limited Scale and Diversification: Pakuwon's rating is constrained by its limited scale and project diversification. Fitch expects the company to generate most of its cash flows from its current established super blocks in the medium term. Based on the current rate of development, the company's land bank of 394 hectares would be sufficient for more than 10 years of development. Although the company will launch a new residential project in West Surabaya in 2H2014, Fitch notes that its projects and cash flows are less diversified than higher rated peers.
Positive rating action is not anticipated in the medium-term given the company's limited scale, projects, and cash flow diversification.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained deterioration of recurring EBITDA from investment properties (IP) /interest below 2.5x
- net debt/net inventory (net inventory defined as IP + Inventory + Property and Equipment - Advances) rises above 50% on a sustained basis
- weakening of business profile as evidenced by significant rise in vacancy rates or a sustain fall in rentals
- any evidence of weakening in liquidity