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July 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia-based PT Multipolar Tbk’s (Multipolar) Long-Term Issuer Default Rating at ‘B+’ with Stable Outlook. The agency has also affirmed Multipolar’s senior unsecured rating at ‘B+’ and USD230m notes due in 2018 at ‘B+'/RR4. The notes are issued by Pacific Emerald Pte Ltd, a wholly owned subsidiary, and guaranteed by Multipolar and certain subsidiaries.
Structural Subordination: Multipolar’s rating reflects the subordination of its cash flows due to its holding company structure. Most of its cash flows are from dividends from 50.2%-owned PT Matahari Putra Prima (MPPA, unrated) and 20.5%-owned PT Matahari Department Store Tbk (MDS, unrated). Therefore, Multipolar’s capacity to meet its debt obligations is contingent upon MPPA’s and MDS’s ability to continue to distribute dividends. We believe both MPPA and MDS will continue to be able to pay Multipolar dividends over the medium term, driven by both companies’ favorable operating performance and strong financial profile.
MPPA, which operates Hypermart, is the fastest-growing hypermarket operator in Indonesia with 99 stores as of end-2013. It has added new stores at double-digit counts over the past three years. MDS has the biggest share of the market for middle-class department stores based on annual turnover. MDS had 125 stores as of end-2013.
Temporary Weakening in FCC: Fitch expects Multipolar’s fixed charge cover (FCC- FFO from wholly controlled entities plus dividends/ interest expense plus rents) to fall below 2x in 2014 from 2.2x in 2013. This is due to a slower-than-expected turnaround in its other businesses and a mismatch in the currencies of its debt and cash flows. However Fitch expects the ratio to improve in 2015 because 99%-owned retail subsidiary PT Nadya Putra Investama (NPI) plans to distribute extraordinary dividends totaling around IDR500bn (USD42m) for 2015-2017. As of end-2013, NPI reported cash balance of IDR568bn. Fixed charge cover is also likely to rise beyond 2015 due to more stable operations at its other businesses, which include integrated IT services, bookstores, and game centers.
Comfortable Liquidity: As of end-March 2014, Multipolar (excluding MPPA) had cash balance of around IDR2trn against IDR222bn in short-term debt. Multipolar also has no significant debt maturing until 2018 when the USD230m notes fall due. In a distressed scenario, Fitch believes Multipolar will be able to access additional liquidity by monetising its various investments. For example, Multipolar’s various investment properties are worth about IDR2trn while its shareholding at MPPA and MDS worth about USD1.4bn at 7 July 2014.
High Fixed Cost Structure: Multipolar’s strategy of renting all its property increases its fixed costs, especially considering retailers’ thin margin buffers. Fitch believes Multipolar’s growing scale and margin stability mitigate its high fixed costs. MPPA has been negotiating with landlords of its hypermarkets to switch from fixed-rate rents to rents that are tied to its turnover. This strategy has helped to cut its consolidated rent to revenue ratio to about 4% in 2013 from about 5% previously. In addition, Multipolar’s association with mall operator PT Lippo Karawaci Tbk (Lippo; BB-/Stable), which owns about 41% of Multipolar’s retail space provides critical operating synergy to both parties. Multipolar’s retail outlets to drive foot traffic to Lippo’s malls, while Lippo is able to offer Multipolar priority in retail locations.
Conservative Strategy in China: Delays in new store openings and underperformance of its existing stores have slowed down Multipolar’s business turnaround in China. However, the company’s Robbinz department stores in China have shown meaningful operating improvement. Although Fitch does not expect significant improvement in the Chinese business over the medium term, the risk associated with this business is mitigated because capital expenditure allocated to it is limited and management has demonstrated a conservative approach in making future investment decisions in China.
Contingent Liability to Temasek: Under the terms of an alliance agreement with Singapore’s Temasek Holdings, if MPPA fails to meet Temasek’s operating performance targets, 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. As of 7 July 2014, Temasek’s 26.1% indirect shareholding at MPPA was worth about USD352m.
Robust Private Consumption: The outlook for modern retail in Indonesia remains robust, driven by the country’s large population, consumers’ increasing spending power, young demographic, and high urbanisation rate. A 40% increase in the minimum wage in the capital Jakarta in 2012 is starting to have an impact on second-tier cities where MPAA and MDS are expanding.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Decline in FCC to below 2x on a sustained basis. This may result from lower-than-expected dividends or significant deterioration in the performance of non-core businesses.
Positive rating action is not anticipated over the medium term unless there is significant turnaround in its other businesses that materially strengthens Multipolar’s FCC on a sustained basis. This is due to Multipolar’s structural subordination and its high fixed-cost structure.