October 20, 2017 / 9:05 AM / 2 months ago

Fitch Downgrades Greenwood to 'BBB(idn)'; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, October 20 (Fitch) Fitch Ratings has downgraded Indonesia-based property developer PT Greenwood Sejahtera Tbk's (Greenwood) National Long-Term Rating to 'BBB(idn)' from 'BBB+(idn)'. The Outlook is Stable. The agency has also downgraded the rating on the company's IDR72 billion senior unsecured bond to 'BBB(idn)' from 'BBB+(idn)'. The downgrade reflects the company's continued inability to achieve meaningful presales, which has resulted in its presales/gross debt ratio remaining below 30%, the level at which Fitch would consider negative rating action, for two consecutive years. We do not expect Greenwood's presales to improve materially until the conclusion of the presidential elections in 2019. The company has substantial recurring income and dividends from its associates, but the slowdown in its development business renders its credit profile in line with a 'BBB(idn)' rating. 'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Continued Weak Presales; Deferred Expansion: Greenwood has reported weak presales since 2015, and it continues to lag its peers. Presales in 2016 fell 24% to IDR32 billion, and presales was only IDR22 billion in 9M17, which came from just one transaction at its TCC Batavia 1 office tower. These levels are a significant decline from the IDR239 billion in 2014. The slowdown was due to continued poor domestic macroeconomic environment, and the government's on-going tax crackdown, which has left buyers cautious. Fitch expects presales to remain low as the company is likely to continue deferring projects because buying sentiment is likely to be weak ahead of the 2019 presidential election. Rising Leverage; Recurring Cash Flows: We expect Greenwood's debt to increase over 2018-2019 as the company funds the construction of its projects via debt, and as the company has to acquire land prior to launching several new projects in 2019. Nonetheless, our expectations of heightened leverage levels are in line with its rating. Additionally, Greenwood's profile is supported by recurring income from its investment properties as well as dividends from those run by its associate entities, which partly make up for its low development sales. Small Scale, High Development Risk: Greenwood's rating reflects its small development scale over the short to medium term. Limited project diversification renders the developer's cash flows more vulnerable to economic downturns than for township developers with large and low-cost land banks. Fitch also sees execution risks for the company as it expands into new areas and cities from its base in Jakarta's CBD. Financing Flexibility: The rating reflects Greenwood's relationship with its ultimate shareholder. Fitch believes the relationship improves the developer's access to funding, which would otherwise be difficult or costly due to the company's small scale and limited record in the property development business. The company also has some flexibility in its capex. DERIVATION SUMMARY Greenwood is rated lower than some of its national peers, such as PT Ciputra Residence (Ciputra Residence, A+(idn)/Stable) and PT Kawasan Industri Jababeka Tbk (KIJA, A(idn)/Stable). Relative to Ciputra Residence, Greenwood has lower leverage and a higher recurring coverage ratio, but these are counterbalanced by Ciputra Residence's execution track record in various townships in the Greater Jakarta area. Ciputra Residence has significantly larger scale than Greenwood, with annual presales consistently exceeding IDR1.5 trillion, which support superior presales/gross debt ratios. KIJA's rating is primarily driven by strong recurring cash flows from its thermal power plant, which has a 20-year power purchase agreement with state-owned PT Perusahaan Listrik Negara (Persero) (BBB-/Positive), as well as from its dry port. KIJA has also been developing and selling projects at its well-established Jababeka industrial estate, which requires limited infrastructure and capex. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Presales to remain weak until 2019 - Capital Square construction to be completed in 2020 - New project launches deferred until 2019 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive rating action is not expected until the company proves successful in its new project launches, with presales exceeding IDR1 trillion, while maintaining a similar financial profile. Developments That May, Individually or Collectively, Lead to Negative Rating Action - Pressure on liquidity, which could be indicated by insufficient cash to meet short-term debt - EBITDA, including dividends from minority interests, to interest expense ratio falling below 1.1x on a sustained basis (2016: 4x) LIQUIDITY Sufficient Liquidity: As of 30 June 2017, Greenwood had a cash balance of IDR123 billion against short-term debt of IDR24 billion. It also has unused facilities of IDR318 billion for construction of its Capital Square project. We do not expect liquidity to be an issue for the company in the next 24 months, because it has not launched new projects and has no need for funding for construction. Furthermore, the company has ample recurring income and dividends from associates to help with its operational cash flow needs. Contact: Primary Analyst Robin Sutanto Analyst +6221 2988 6811 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments - Fitch includes land and advances for land in inventory, and customer deposits in accrued expenses. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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