Moody's Investors Service has downgraded the corporate family rating of PT Alam Sutera Realty Tbk (IDX: ASRI) to B3 from B2 - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded the corporate family rating of PT Alam Sutera Realty Tbk (IDX: ASRI) to B3 from B2. At the same time, Moody’s has downgraded the backed senior unsecured rating of the 2021 notes and 2022 notes issued by Alam Synergy Pte. Ltd., a wholly owned subsidiary of Alam Sutera, to B3 from B2.

The notes are guaranteed by Alam Sutera and most of its subsidiaries. The outlook on the ratings above remains negative.

The ratings downgrade to B3 reflects Moody’s expectations that Alam Sutera because of a slowdown in its land sales to China Fortune Land Development Co., Ltd. (CFLD, Ba3 stable), and refinancing risk on its US dollar bond $175 million due April 2021 and $370 million due April 2022.

“Alam Sutera’ marketing sales and cash flow are reliant on proceeds from land sales to CFLD, which slowed in 2019 and we do not expect a recovery in 2020. The outlook remains negative to reflect Alam Sutera’ maturity wall, because all of its US-dollar notes will mature in 2021 and 2022. The company is reliant on external funding, but there are no committed funds to address the refinancing risk,” says Jacintha Poh, a Moody’s VP and senior credit officer in an official statement last week.

In 2019, Alam Sutera achieved core marketing sales of around Rp2.2 trillion (US$157.14 million), and land sales to CFLD of Rp930 billion, which were behind the company’ full-year marketing sales target of around Rp4 trillion. In 2020, Alam Sutera targets to achieve core marketing sales of around Rp3.5 trillion, and land sales to CFLD of Rp500 billion.

Absent land sales to CFLD, Moody’s expects that Alam Sutera’s credit metrics will remain weak over the next 12 – 18 months. Leverage, as measured by adjusted debt ot homebuilding EBITDA, will stay elevated, at more than 6.0x. Interest coverage, as measured by homebuilding EBIT or interest expense, will stay below 2.0x. For the 12 months ended Sept. 30, 2019, Alam Sutera’s leverage registered 6.5x and interest coverage 1.6x.

Alam Sutera held cash and cash equivalents of Rp1.1 trillion as of Sept. 30, 2019. Moody’s expects the company to generate around Rp800 billion in cash from operations over the next 12 – 18 months, which will be insufficient to cover the repayment of its 2021 notes.

Consequently, the developer is reliant on external funding to address its notes maturity. The company has obtained consent from existing noteholders to incur up to $185 million secured financing on Jan. 28, 2020.

At the same time, Alam Sutera shared that it is in discussion with banks to raise secured Indonesian Rupiah loan and investors to participate in a private placement issuance, but none of these plans are committed.

In terms of environmental, social and governance factors, Moody’s has considered governance risk stemming from the company’ weak financial management, because of its debt maturity wall, which resulted in significant refinancing risk.

And concentrated ownership by its promoter and a five-member board of commissioners, of which, only two members are independent. Nonetheless, Alam Sutera is run by experienced professionals and has a track record of reducing land acquisitions to preserve liquidity.

The public listed’ B3 ratings reflect volatility in its earnings and cash flow, driven by reliance on one-off transactions with CFLD, instead of the company’ core business of property development. Nonetheless, the builder continues to generate strong gross profit margins in excess of 50 percent, because of it large and low-cost land bank.

The ratings are constrained by the issuer’ small scale and limited geographic diversity. Alam Sutera is also exposed to the cyclical property sector, with limited contributions from the more stable recurring income stream from its investment properties.

Given the negative outlook, a ratings upgrade is unlikely over the next 12 – 18 months. Nevertheless, the outlook could return to stable if the company improves its liquidity by addressing the refinancing risk of its 2021 and 2022 notes and continues to execute its core marketing sales, such that adjusted homebuilding EBIT/interest expense is above 1.0x.

Moody’s could downgrade the ratings if Alam Sutera is unable to address the refinancing risk of its 2021 notes by April 2020 or there is a protracted weakness in the company’ operations or a material depreciation in the Indonesian rupiah, which could increase the company’ debt servicing obligations, such that adjusted homebuilding EBIT or interest expense falls below 1.0x.

Established in November 1993 and listed on the Indonesian Stock Exchange in December 2007, the firm is an integrated property developer in Indonesia that focuses on the sale of land lots in accordance with township planning requirements, as well as property development in residential and commercial segments in Indonesia.

As of Dec. 31, 2019, the family of The Ning King owned around 47 percent of the company.

US$1: Rp14,000

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