JAKARTA (TheInsiderStories) – The sharp deprecation in the Indonesian Rupiah against the US Dollar will weaken the debt servicing ability of property developers, a credit negative, says Moody’s Investor Services in the latest report. The agency also downgraded the corporate family rating of publicly listed, PT Modernland Realty Tbk (IDX: MDLN), to B3 from B2.
“More than two-thirds of the companies’ aggregated debt is in US Dollars, while their revenue is earned in Rupiah. With the rupiah sliding about 15 percent to its weakest level since the 1998 Asian financial crisis, this high exposure to foreign currency debt is creating significant risk for the property developers at a time when the coronavirus outbreak is already weighing on earnings,” says Jacintha Poh, an analyst at Moody’s.
While five out of the six rated property developers have financial hedges to protect the principal sum of their US Dollar debt, these hedges only cover rupiah deprecation to certain levels, with around 57 percent of their American Dollar debt protected as of March 31.
Moreover, the companies’ US Dollar interest expense is largely unhedged. Combining the effects of weaker earnings and a higher debt burden, Moody’s expects the developers’ financial leverage – as measured by homebuilding debt or EBITDA – will deteriorate significantly in coming months.
And if the Rupiah weakens to 17,000 against the US Dollar – from about 16,575 as of 23 March – only two out of the six developers would remain within the leverage thresholds for their ratings, namely PT Pakuwon Jati Tbk (IDX: PWON) (Ba2 stable) and Bumi Serpong Damai TbK (IDX: BSDE) (Ba3 stable).
The exposure among the property developers to the Rupiah’ weakness varies, with Moody’s sensitive testing showing that PT Alam Sutera Realty Tbk (IDX: ASRI) (Caa1 negative) and PT Modernland Realty Tbk (IDX: MDLN) (B3 negative) would be the most exposed if the Rupiah depreciates to 17,000.
Recently, Moody’s has downgraded the corporate family rating of Modernland Realty to B3 from B2. At the same time, Moody’s has downgraded the backed senior unsecured rating of the 2021 notes issued by JGC Ventures Pte. Ltd. and the 2024 notes issued by Modernland Overseas Pte. Ltd. to B3 from B2.
Both companies are wholly owned subsidiaries of the company and the notes are guaranteed by the parent company and most of its subsidiaries. The outlook on all ratings is changed to negative from stable.
“The downgrade reflects our expectation that a drop in demand for residential properties and industrial land caused by the coronavirus outbreak and slower economic growth will weaken Modernland‘ earnings and credit metrics to levels no longer consistent with its B2 rating,” says Poh.
She continues, “the negative outlook reflects Modernland’ increased refinancing risk, as the company will likely be reliant on external funding to address its 2021 maturity amid challenging market conditions for fund raising,” she noted.
Moody’s estimating, Modernland‘ marketing sales of around Rp2.5 trillion (US$156.25 million) in 2020 while cash and cash equivalents of Rp339 billion as of Sept. 30, 2019. Its expects the firm to generate around Rp1 trillion in cash from operations between October 2019 and September 2021, which will be insufficient to cover the repayment of its $150 million 2021 notes.
Consequently, Modernland will likely rely on external funding to address its notes maturity. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.
The property sector has been one of the sectors affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the expected weakening in Modernland’ credit profile and its exposure to Indonesia have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and the company remains vulnerable to the outbreak continuing to spread.
Modernland Realty is an integrated property developer in Indonesia that focuses on industrial town development, residential development and township development. It also has small exposures to the hospitality and commercial property segments. The company listed on the Indonesia Stock Exchange in 1993, and is controlled by the Honoris family through direct ownership and various holding companies.
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