JAKARTA (TheInsiderStories) – Fitch Ratings has downgraded Indonesia-based property developer PT Modernland Realty Tbk‘ (IDX: MDLN) Long-Term Issuer Default Ratings (IDR) to ‘RD’ from ‘C’. The downgrade follows the expiry of the 30-days grace period following the non-payment of the coupon on the group’ US$150 million senior unsecured notes due 2021, which are issued by JGC Ventures Pte., Ltd.
The cross-acceleration clause of the $240 million 2024 notes has also been triggered by the non-payment of the 2021 notes. The ‘RD’ rating indicates an issuer that in Fitch’s opinion has experienced an uncured payment default, but has not entered into bankruptcy filings and has not ceased operating.
At the same time, Fitch has affirmed the ratings on $150 million notes due 2021 and $240 million notes due 2024 issued by its wholly owned subsidiaries, JGC Ventures and Modernland Overseas Pte., Ltd., respectively, and guaranteed by Modernland, at ‘C’ and Recovery Rating of ‘RR4’.
According to the agency, the issuer says its liquidity is under severe pressure, which led to the restructuring of a Rp150 billion ($10.13 million) bond in July 2020. The company claims the pandemic has made it difficult to collect payments from buyers, and it has granted payment deferrals and seen increased cancellations from pre-sales.
Efforts to revive sales may also face challenges due to weak buyer sentiment amid the pandemic. The publicly announced debt restructuring, with its shares and onshore bonds suspended on the Indonesia Stock Exchange, has cast doubt on Modernland‘ business continuity and may impair confidence in the company’ projects.
So far, JGC Ventures has applied for a moratorium and will restructure its debt in the Singapore courts. The company plans to provide bondholders with a restructuring proposal sometime in October. Fitch will reassess the developer’ capital structure and reassign an Rupiah once the restructuring is finalized.
Fitch elaborated the key assumptions of the rating are limited access to new funding and no pre-sales in both industrial and residential segments in second quarter (2Q) of 2020 with pre-sales to gradually resuming in 3Q and 4Q. Then, zero collections in 2Q and 3Q from industrial properties sold in the past, and also around 25 percent of Modernland‘ residential pre-sales are paid in installments to the developer.
“We have assumed zero collections on these in 2Q of 2020 and 3Q of 2020,” said the report
In addition, said the rater, collections from new residential pre-sales to resume in 3Q and no significant reduction in operating expenditure except for marketing expenses, in line with lower pre-sales. The recovery analysis assumes Modernland would be liquidated in a bankruptcy rather than be considered a going-concern.
Fitch has also assumed a 10 percent administrative claim in the recovery analysis. The estimate reflects their assessment of a 50 percent advance rate on the value of trade receivables under a liquidation scenario, and the same rate for inventory, fixed assets, investments in associates and land bank for long-term development.
“We adjusted the advance rate assumptions for trade receivables, investments in associates and land bank for long-term developments to 50 percent from a previous 75 percent, 100 percent and 100 percent, respectively. The adjustments reflect our view that the company‘ financial distress may have influenced buyers’ confidence over the company’s projects, impairing the recovery prospects of these assets,” adds by the report.
Fithc have also deducted from trade receivables the amount due from PT Waskita Modern Realty and from investments in associates, PT Lotte Land Modern Realty and Waskita. This is because we believe the company may not be able to recover these assets in light of the challenges faced in collecting the amount due from Waskita in the past year, while the joint-venture projects are still at an early development stage.
These estimates result in a recovery rate corresponding to an ‘RR2’ Recovery Rating for Modernland‘ senior unsecured notes. Nevertheless, Fitch rates the senior notes ‘C’ and maintained the Recovery Rating of ‘RR4’ because under the agency’s Country-Specific Treatment of Recovery Ratings Criteria, Indonesia falls into Group D of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer’s IDR and a Recovery Rating at ‘RR4’.
Edited by Editorial Staff, Email: email@example.com