JAKARTA (TheInsiderStories) – International credit rating agency Fitch Ratings said that the recent depreciation of the rupiah may add pressure to developers in Indonesia which have a large portion of loans denominated in US dollar and already face slowing property demand.
The Rupiah is the second worst performing currency in Asia in the last three months and broke through Rp14,200 per US dollar, a level not seen since December 2015.
In the short term, this will affect Indonesian homebuilders as their interest and capital payments will increase in local-currency terms. Each of the Fitch-rated developers has 50 per cent or more of their borrowings in US dollars as dollar-denominated bonds are traditionally more attractive because they have a broader investor base and are cheaper than bank loans or domestic bonds.
Fitch also believes that the currency depreciation may also lead buyers to hold off big-ticket purchases; on top uncertainties around the presidential election in 2019. Consequently this may result in lower-than-expected presales and associated cash flows.
Indonesian developers’ thick profit margins stem from their large, low-cost land banks, which provide sufficient cushion against the rupiah’s depreciation, but the margins may thin over time if the soft property demand and currency depreciation persist.
The rupiah’s depreciation will also have limited impact on rated developers’ leverage profiles. Should the rupiah weaken to around 15,000 to the US dollar, leverage for Fitch’s rated developers will increase by between 2 per cent and 6 per cent, which leaves leverage broadly inline with the rating guidelines.
In Fitch’s view, PT Lippo Karawaci Tbk (IDX: LPKR) would be most vulnerable among Fitch-rated Indonesian homebuilders to a persistent rupiah weakness. It has negligible US dollar cash inflows and its annual coupon payments exceed the dollar cash balance it maintains.
As of 31 December 2017 it reported only US$13 million cash reserves versus an annual coupon payment of around $65 million. The situation is particularly acute because it has limited operating cash flows to service its interest payments and rent, barring planned asset sales.
PT Alam Sutera Realty Tbk (IDX: ASRI) is the next worst affected, with negligible US dollar cash inflows and its annual coupon payments also exceed the dollar cash balance it maintains. As of 31 December 2017 it reported only $8 million in cash versus an annual coupon payment of around $33 million. Fitch, however, notes that ASRI has fully hedged the principal of the dollar bonds, which limits its exposure only to the coupon payments.
PT Bumi Serpong Damai Tbk (IDX: BSDE) would also be at a disadvantage as it has not entered into any hedging contracts for its US dollar notes. BSDE only had $29 million in cash at end-2017 against $42 million annual coupon payments, including the recently issued $300 million 7.25 per cent notes.
The risks for BSDE are mitigated by the company’s comfortable margin cushions, discretionary land acquisitions, and well-laddered debt maturity, which will allow BSDE to conserve cash amid increased pressure on cash flows from the rupiah depreciation.
PT Pakuwon Jati Tbk (IDX: PWON) and PT Ciputra Development Tbk (IDX:CTRA), are likely the most resilient in the face of a weakening rupiah among its peers. This is because PWON fully hedged the principal of its $250 million bonds with upper strike price of up to Rp16,500/US dollar and it maintains sufficient cash in dollars to cover the annual coupon payments.
Similarly, CTRA has hedged the principal on its Singapore dollar bonds with upper strike price of up to Rp12,525 per Singapore dollar, and therefore limits exposure mainly to the coupon payments. As of end-2017 CTRA reported a cash balance of $16 million against annual coupon payments of around SGD8 million.
Fitch believes the US dollar exposures for PT Agung Podomoro Land Tbk (IDX:APLN), PT Kawasan Industri Jababeka (IDX:KIJA) and PT Modernland Realty Tbk (IDX:MDLN) are manageable as they have sufficient cash in US dollars to cover annual coupon payments and they have hedges in place for a substantial part of their outstanding dollar bonds.