Feb 24 (Reuters) - (The following statement was released by the rating agency)
This announcement replaces the version published on 24 February 2014 to add the Outlook for the National Long-Term Rating.
Fitch Ratings has published PT Ciputra Residence’s (Ciputra Residence) National Long-Term Rating and National senior unsecured rating at ‘A-(idn)'. The Outlook is Stable. At the same time, the agency has also assigned a National Rating of ‘A(idn)’ to the company’s proposed issuance of up to IDR500bn of bonds that have a 20% partial credit guarantee (PCG) from International Finance Corporation (IFC).
The ratings reflect Ciputra Residence’s small scale, conservative credit metrics and its strong linkage with its parent, PT Ciputra Development Tbk (Ciputra Development).
The rating assigned to the proposed bonds is based on a partial guarantee for 20% of the principal amount offered by the IFC, a member of the World Bank Group that focuses on developing the private sector. The partial guarantee reduces the loss severity in case of default and Fitch has raised the issuance’s rating by one notch above the issuer’s rating. The overall recovery estimate considering the execution of the guarantee and the proceeds from company liquidation determine the number of the notches for the uplift.
‘A’ National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.
Conservative Credit Metrics: Ciputra Residence’s rating reflects its conservative credit metrics with the developer in a net cash position since 2008. This is in line with the Ciputra’s group prudent approach in terms of taking on debt, where the parent company Ciputra Development has also been disciplined in maintaining a net cash position. Fitch expects the company’s credit metrics to remain conservative as additional debt for expansion will remain small in comparison to the company’s size.
Linkage with Ciputra Development: Ciputra Residence’s rating benefits from linkage with parent company, Ciputra Development, which has a stronger credit profile. Under Fitch’s Parent and Subsidiary Rating Methodology, we view that there is strong legal, operating, and strategic linkage between Ciputra Residence and its 99.99% shareholder Ciputra Development. This linkage captures reputational risk from carrying the same brand name, significant degree of overlap in boards’ composition and alignment of Ciputra Residence’s expansionary strategy and financial policy with the overall group‘s.
Low Yielding Investment Property Assets: Ciputra Residence’s current source of recurring income is from its water park and theme park operations, with rental income totalling around IDR21bn at end September 2013 (which accounted for 3% of total revenue). The small recurring income is counterbalanced by low interest burden, resulting in an estimated recurring EBITDA to interest coverage of 1.2x at end 2013. However, the agency expects recurring EBITDA to interest coverage to fall to below 1.0x in the medium-term as the company’s interest burden rises following the issuance of the IDR500bn bonds.
Small Scale: Ciputra Residence’s limited scale in terms of contracted sales and limited project diversification exposes the company to greater volatility in earnings. Ciputra Residence recorded EBITDA of IDR238bn (USD19m) for the nine months to September 2013, which is around the same amount as other entities rated in the ‘BBB(idn)‘category. Although the company plans to embark on numerous projects, Fitch views its prudent expansion strategy and the track record of the overall group on property development as positive. Partial Credit Guarantee: The proposed bonds include a partial credit guarantee of 20% of the outstanding principal amount from IFC. The guarantee is exercisable on pre default basis to cover any shortfall in principal or interest due.
A positive rating action is not expected in the medium term given the company’s limited scale and size.
Negative: Future developments that could individually or collectively lead to negative rating actions include:
- Pre-sales/gross debt falls below 3.0x (2012: 26.0x)
- There is a weakening linkage between the company and Ciputra Development