JAKARTA (TheInsiderStories) – Fitch Ratings has downgraded Indonesia-based developer, PT Agung Podomoro Land Tbk‘ (IDX: APLN) Long-Term Issuer Default Rating (IDR) to ‘C’ from ‘CCC-‘. At the same time, the US$300 million notes due in 2024, issued by a wholly owned subsidiary and guaranteed by company, have been placed on Rating Watch Negative (RWN).
The downgrade follows disclosure made by the company that its 58 percent-owned subsidiary, PT Sinar Menara Deli, has signed an indicative term sheet to extend maturity of Rp350 billion ($24.14 million) medium-term notes (MTNs) to August 26, 2021 from the original due date on August 26, 2020.
Fitch regards the restructuring of the unit’ MTNs as a distressed debt exchange (DDE) under its criteria, because its done to avoid a payment default and there is material reduction in terms. Sinar Menara is a restricted subsidiary under Agung Podomoro‘ US Dollar notes documentation and therefore APLN’ IDR has been downgraded to ‘C’ to reflect the likelihood of impending default.
The rating on APLN’ US dollar notes is unaffected by the DDE proposal at Sinar Menara, as the subsidiary has not yet triggered the cross-default clause under the issuer’ US Dollar notes documentation. The rating has been placed on RWN to reflect the risk of a default under the unit’ MTNs, which could therefore lead to cross-acceleration of the company’ US Dollar notes.
Fitch believes Sinar Menara sought extension of the MTNs to avoid payment default in August 2020 when the notes mature, given the company’ tight liquidity. The subsidiary had only around Rp50 billion cash as of end-June, and does not have another source of liquidity to repay the MTNs. Its operating profile has weakened significantly amid challenging property conditions in Indonesia.
“We believe the extension of the MTNs’ maturity represents a material reduction in terms for the note holders, as it is one of the key terms under the MTNs,” said Fitch Ratings in an official statement.
Fitch regards any change to key terms as a material reduction unless there is clear evidence that investors would be indifferent between original and new terms. Agung Podomoro in its first half (1H) of 2020 financial report also disclosed that its 63 percent-owned subsidiary, PT Bali Perkasasukses, which owns Indigo Hotel, received relaxation on term loans installments from PT Bank QNB Indonesia for three months until July 2020.
The developer confirmed that the subsidiary is current in interest payments. The amendment in terms for this loan is not considered a DDE because the flexibility of loans, compared with bonds, make it difficult to have a categorical determination of a DDE for this loan. This view is supported by the fact that the extension does not include the introduction of payment-in-kind interest or an exchange of debt for equity – features in bank loans that would be considered as DDE.
Weak Liquidity, Pending Divestment
Agung Podomoro‘ liquidity profile is weak, as the pandemic has presented challenges across its property portfolio and delayed its plan to divest investment properties. The company reported a depleting consolidated cash balance of Rp492 billion as of end-June, from Rp767 billion as of end-March.
Fitch estimates that the issuer’ liquidity at the holding company is tight such that it might be unable to meet the $12 million coupon payment due in December 2020 on its US Dollar notes. Fitch stated, “We believe its ability to meet this coupon payment is dependent on the completion of the sale of investment property or other external support is forthcoming.”
“We assess APLN’ linkage with PT Indofica, a closely held business of the sponsor’ family that owns 80 percent of the company, as weak, and therefore rate at the standalone level,” said the rating agency.
Indofica has not extracted meaningful cash flow from the developer over the last few years aside from limited dividends, and there is protection in place for bondholders in bond documents and local regulatory oversight of related-party transactions.
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