JAKARTA (TheInsiderStories) - Moody’s Investors Service has affirmed the B2 corporate family rating of PT Modernland Realty Tbk and affirmed the B2 senior unsecured rating of the 2019 bonds issued by Marquee Land Pte. Ltd., a wholly owned subsidiary of Modernland. The bonds are guaranteed by Modernland.
At the same time, Moody’s has assigned a senior unsecured bond rating of B2 to the proposed senior unsecured bonds to be issued by Modernland Overseas Pte. Ltd., a wholly owned subsidiary of Modernland. The proposed bonds are unconditionally and irrevocably guaranteed by Modernland and rank pari passu with the 2019 bonds.
The outlook on the ratings is ‘stable’, Moody’s said in a statement.
Modernland will use the majority of the net proceeds towards the partial redemption of the USD248 million 2019 senior unsecured notes issued by Marquee Land Pte. Ltd.
Ratings Rationale
“The ratings affirmation reflects Modernland’s healthy financial and liquidity profile — despite a challenging operating environment in 2016 —
supported by its ability to successfully execute its joint venture agreement with Astra Land Indonesia,” says Jacintha Poh, a Moody’s Vice
President and Senior Analyst.
In October 2016, Modernland’s wholly-owned subsidiary, PT Mitra Sindo Makmur (MSM, unrated), entered into a 50:50 joint venture agreement with Astra Land Indonesia (unrated), which is in turn a joint venture company between Hongkong Land Holdings Limited (Hongkong Land, A3 stable) and PT Astra International Tbk (unrated). The MSM-Astra Land Indonesia joint venture company agreed to buy from Modernland, a 67 hectare plot at the Jakarta Garden City township for approximately IDR3.2 trillion to develop residential properties.
“While most of the bond proceeds will be used for refinancing, we anticipate a net increase in borrowings of around USD50 million for the
premium on early redemption of its 2019 notes and working capital purposes. This incremental debt can be accommodated within its B2 rating
parameters,” added Poh, who is also Moody’s Lead Analyst for Modernland.
“More importantly, the partial refinancing of its 2019 bonds is credit positive, because the company’s weighted-average debt maturity will be
extended,” Poh said.
Over the next 12-18 months, Moody’s expects that Modernland’s revenue will grow around 20%-25%, driven by residential sales at its Jakarta
Garden City township and industrial land sales at Modern Cikande, given that the developer will likely increase the launch of new products at
these projects.
Consequently, Moody’s expects that over the next 12-18 months, Modernland’s adjusted debt/homebuilding EBITDA will measure around 4.0x
and adjusted homebuilding EBIT/interest expense will stand at around 2.5x.
In 2017, Modernland targets to achieve Rp4.3 trillion of marketing sales; specifically, Rp3 trillion from the Jakarta Garden City township
and Rp1.3 trillion from the Modern Cikande Industrial Estate. Moody’s base case expectation is that marketing sales in the same period will
total around Rp3.8 trillion.
Due to a challenging macro environment — which led to lackluster demand for property and therefore a slowdown in new project launches in 2016 — Modernland’s revenue for the year ended 31 December 2016 (FY2016) fell 17% year-on-year to IDR2.5 trillion. The decline was offset by an increase in its profit margin, because more than half of its revenue was contributed by land sales, which typically generate higher margins than
property sales.
As a result, Modernland’s key credit metrics in FY2016 remained broadly stable, with adjusted debt/homebuilding EBITDA registering 3.4x (FY2015: 3.2x) and an adjusted homebuilding EBIT/interest expense of 2.3x (FY2015: 2.3x).
The stable ratings outlook reflects Moody’s expectation that Modernland will achieve its sales target and grow its operational cash flow, build
a record of executing successfully its Jakarta Garden City township, and maintain financial discipline while pursuing growth.
The ratings could be upgraded if Modernland successfully executes its expansion strategy — supported by sustained improvements in sales
performance and positive free cash flow generation — and maintains solid liquidity in the form of cash balances and committed facilities.
The credit metrics that will support an upgrade include an adjusted debt/homebuilding EBITDA below 3.5x and adjusted homebuilding
EBIT/interest coverage above 3.0x on a sustained basis.
By contrast, the ratings could face downward pressure if: (1) Modernland fails to implement its business plans; and/or (2) there is a
deterioration in the property market, leading to protracted weakness in Modernland’s operations and credit profile. Moody’s considers an adjusted debt/ homebuilding EBITDA over 5.0x, and adjusted homebuilding EBIT/interest coverage below 2.0x on a sustained basis as indications that a downgrade may be necessary. (*)