August 19, 2014 / 7:22 AM / 3 years ago

Fitch Assigns Modernland Realty's USD191m Notes Final 'B' Rating

(The following statement was released by the rating agency) SINGAPORE/JAKARTA/SYDNEY, August 19 (Fitch) Fitch Ratings has assigned Indonesia-based property developer PT Modernland Realty Tbk's (Modernland; 'B'/Stable) USD191m 9.75% senior notes due in 2019 a final 'B' rating with a Recovery Rating of 'RR4'. This follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 14 July 2014. The notes will be issued by a wholly owned subsidiary, Marquee Land Pte. Ltd, and guaranteed by Modernland and certain of its subsidiaries. On 13 August 2014 Modernland announced that the holders of 61.59% of its USD150m 11% 2016 notes have agreed to exchange their notes for the 2019 notes. New funds following the issue of the 2019 notes and the debt exchange will be used to repay debt and for general corporate purposes. Fitch views this exchange favorably as it extends Modernland's debt maturity profile and lowers its overall interest expense. The notes are rated at the same level as Modernland's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. KEY RATING DRIVERS Limited Recurring Income: Modernland's rating reflects its limited recurring revenue, which differentiates it from higher rated global peers. The company derives recurring revenue from estate management fees and its newly opened hotel operations, but these segments account for less than 10% of annual EBITDA. Modernland's small recurring revenue base is the main constraint on its ratings, particularly given the cyclicality of the property development sector. Moderating Execution Risks: Jakarta Garden City's (JGC) strategic location, established infrastructure, and affordability compared with other properties in the Kelapa Gading district in northern Jakarta underpin Modernland's business growth prospects. There is execution risk with Modernland taking over this project from Keppel Land. However, Fitch believes the risk has moderated, as evidenced by Modernland's successful new launch following the acquisition. The 200 new units it launched in May 2014 have all been sold. Aeon's new mall in JGC, which will be in operation by end-2015, will be important in attracting potential buyers in future launches. Nevertheless, high execution risks remain for Modernland's longer-term expansion plan in Bekasi, an important satellite city about 16 km from Jakarta. Success of this project is contingent upon the timely execution of accompanying infrastructure and the company's ability to build critical mass. Project Diversification: The ratings also reflect Modernland's sizeable landbank, which is diversified by location and evenly balanced between industrial and residential use. Over the next 18 months, cashflows will be primarily driven by presales from residential estate JGC and industrial estate Modern Cikande. Over the longer term, the company will also look to launch its second industrial estate in Bekasi. Cash Buffer from ASRI: Cashflows from land sales to PT Alam Sutera Realty Tbk (ASRI, B+/Stable) mitigate the execution risks by providing sufficient liquidity. In 2014, Modernland expects to receive IDR900bn from land sales to ASRI. In the year to May 2014, company received IDR400bn. Modernland's liquidity profile is also supported by its discretion over land acquisition and the minimal capex required for the company to generate cashflows from its major projects in JGC and Cikande. This is because both projects already have established infrastructure. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Decline in presales/ gross debt ratio to below 30% (2013: 55%) on a sustained basis - Net debt/net inventory above 1.0x (2013: 0.59) on a sustained basis, possibly resulting from delays in project execution or weaker-than-expected presales. Positive rating action is not expected unless Modernland demonstrates a track record of timely project execution, leading to improved scale and project diversification, or a significant improvement in recurring income. Contact: Primary Analyst Shahim Zubair, CFA Associate Director +65 67967227 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Erlin Salim Associate Director +6221 2988 6811 Committee Chairperson Andrew Steel Managing Director +65 6796 7231 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available at Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 28 May 2014 are available at Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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