September 20, 2017 / 1:55 AM / a year ago

Fitch Assigns 'BB-' Final Rating to Ciputra Development's MTN

(The following statement was released by the rating agency) JAKARTA, September 19 (Fitch) Fitch Ratings has assigned a 'BB-' final rating to Indonesia-based developer PT Ciputra Development Tbk's (BB-/Stable) SGD150 million 4.85% unsecured unsubordinated medium-term notes (MTN) due in 2021. The assignment of the final rating follows a review of the final documentation conforming to the draft documentation previously received. The final rating is the same as the expected rating assigned on 11 September 2017. The notes are rated at the same level as the company's Long-Term Issuer Default Rating (IDR). The rating of the notes is not notched down despite being structurally subordinated as Fitch believes that the noteholders will not be impaired as prior ranking debt is less than 2.5x of Ciputra Development's EBITDA. Fitch expects Ciputra Development's financial profile to remain within the parameters of its 'BB-' Long-Term IDR as part of the proceeds would be used for refinancing existing foreign-currency unsecured debt. The rest of the funds will be for working capital needs, as well as potentially refinancing existing local-currency secured debt. KEY RATING DRIVERS Rating Based on Consolidated Profile: Fitch analyses Ciputra Development and its subsidiaries as a single economic entity because of their strong intra-group legal and operational linkages that stem from a commonality in shareholding and board structure among the group companies. Fitch believes these linkages give Ciputra Development strong control over its subsidiaries and therefore they operate as a single entity. MTN Not Notched Down: The rating on the notes is not notched down from Ciputra Development's IDR even though the notes are structurally subordinated to debt at the operating subsidiaries. This is because prior ranking debt is less than 2.5x EBITDA, the level at which Fitch considers that creditors at Ciputra Development could be impaired. Additionally, Fitch notes that the company's estimated ratio of unencumbered assets to unsecured debt is greater than 1.5x, supporting our view that noteholders will not be impaired. Diversified Portfolio, Solid Recurring Income: Ciputra Development is one of Indonesia's most diversified property developers by product, geography and segmentation. The company has 56 residential projects and 19 commercial properties, which include malls, hotels and hospitals in more than 30 Indonesian cities. The diversified properties mean that the group generates multiple revenue streams across various segments of the property market. Its commercial property business also provides strong debt service visibility with a robust recurring coverage ratio, as measured by Fitch's forecast of revenue/net interest, of 3.8x in 2017. Large Land Bank: Ciputra Development has a land bank of around 1,400 hectares, making it one of the largest portfolios owned by developers in Indonesia. Its land bank is also relatively well-spread geographically, with a sizeable presence in Greater Jakarta and Greater Surabaya. This bodes well for the company's credit profile, as it ensures project longevity, especially during the current high land-price environment. Strong Joint-Development Record: Apart from its wholly owned projects, the Ciputra group's strategy includes joint developments with land owners on a profit/revenue sharing scheme. This helps the group expand its operational scale, with a lower balance sheet burden. However, this strategy does not allow Ciputra Development full claim on project cash flows. Hence, we have adjusted the consolidated profile to take into account the amounts attributable to the company in proportion to its stakes in the projects. Weak Presales, Metrics Still Robust: We expect Ciputra Development to continue facing weak presales in 2017, especially with the continued delay in new project launches, after 2016 presales fell 22% yoy (14% on an attributable basis). Our 2017 total target of IDR7.6 trillion represents just a 6% yoy growth. On an attributable basis, we expect a decline of 8%. Due to the weak presales environment, we expect the company's presales turnover to weaken, falling to marginally under 1x in 2017-2018. Nonetheless, we think the company's metrics still merit a 'BB-' rating, as it has sufficiently low leverage, high recurring cover and strong presales turnover, relative to other Fitch-rated developers. DERIVATION SUMMARY Ciputra Development's profile is well-positioned relative to other 'BB-' rated developers such as PT Pakuwon Jati Tbk (PWON, BB-/Positive), PT Bumi Serpong Damai Tbk (BSD, BB-/Stable) and PT Agung Podomoro Land Tbk (APLN, BB-/Stable). PWON is rated at the same level despite Ciputra Development's larger scale and project diversification with similar leverage, PWON's Outlook is Positive, reflecting our expectations of the company's increasing scale and diversification. PWON's rating reflects its robust investment property portfolio, which allows it to generate strong cash flows from operations, as well as its significantly higher recurring cover ratios. BSD operates on a larger scale than Ciputra Development, and both companies generate similar levels of recurring cover. However, BSD's scale advantage is countered by its concentrated development portfolio, as well as a higher leverage, relative to Ciputra Development, and hence they have the same rating. Ciputra Development's profile is similar to APLN's. Both companies have similar development property scales, with similar levels of recurring cover and comparatively high degrees of diversification across their portfolios relative to Indonesian developers. As a result, the two companies are rated at the same level. KEY ASSUMPTIONS Fitch's key assumptions for the consolidated profile include: - Revenue recognition: houses - 20%-25% in year two, 50% in year three and the remainder in year four; apartments -25% over years one to four - Cash collection over five years - Attributable presales to amount to IDR5.4 trillion in 2017 and IDR6 trillion in 2018 - Capex, excluding land acquisition, to peak at IDR1.1 trillion-1.2 trillion annually in 2017-2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Attributable presales reaching a minimum of IDR7 trillion on a sustained basis - Growth in investment properties and hotel assets such that recurring revenue increases to more than IDR3 trillion, with the five largest properties accounting for less than 50% of recurring revenue - Recurring revenue net interest cover ratio sustained above 4.5x - Leverage, as measured by net debt/adjusted inventory, sustained below 30% Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Recurring revenue/net interest expense falling below 3.0x on a sustained basis - Leverage, as measured by net debt/adjusted inventory, rising above 40% on a sustained basis - Weakening in legal and operational ties between the parent and the operational subsidiaries LIQUIDITY Liquidity Adequate: Ciputra Development should have sufficient liquidity on a consolidated basis to meet maturities due. Liquidity has tightened due to several projects allowing for longer-tenor instalments and is set to tighten further with a SGD48 million medium-term note due in 2018. Nonetheless, it still has IDR7 trillion in unused facilities, sufficient to meet maturities of under IDR1 trillion due by end-2017. Contact: Primary Analyst Bernard Kie Associate Director +65 6796 7216 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Robin Sutanto Analyst +62 21 2988 6811 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 11 September 2017 Summary of Financial Statement Adjustments - Fitch includes movements in advance payments from customers, land for development as well as advances made for land purchases under working capital changes. Fitch also adds amortised cost of debt back to total debt outstanding. 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