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July 17 (The following statement was released by the rating agency)
Fitch Ratings has assigned PT Pakuwon Jati Tbk's (Pakuwon, B+/Stable) tap of up to approximately USD30m of its US dollar senior unsecured notes a rating of 'B+', with a Recovery Rating of 'RR4'. The additional notes will have the same terms and conditions as the recent issue of USD168m 7.125% senior unsecured notes due 2019, which was rated 'B+'. Fitch believes that Pakuwon's credit profile will remain appropriate for its rating despite the additional issuance.
The notes will be issued by wholly owned subsidiary 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.
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 property portfolio, which contributed 48% of total revenue in 2013. Shopping mall and office properties, which have a long-term lease profile, accounted for 42% of total revenue.
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 of the wider property market and volatility in its property development business. 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 are large mixed-use, high-rise developments, known as superblocks, which include apartments, office, retail, and sometimes hotel space. 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 serving as focal points for local communities. The company has a strong track record of managing its lease retail occupancy, and consistently achieves occupancy that is above the industry average.
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 Indonesian 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 superblocks 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 2H14, its projects and cash flows will continue to be 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 (2013: 7%)
- weakening of business profile as evidenced by significant rise in vacancy rates or a sustained fall in rentals
- any evidence of weakening in liquidity