Moody's Investors Service has placed on review for downgrade the Caa1 corporate family rating (CFR) of PT Alam Sutera Realty Tbk (IDX: ASRI) - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has placed on review for downgrade the Caa1 corporate family rating (CFR) of PT Alam Sutera Realty Tbk (IDX: ASRI). The agency has also downgraded the backed senior unsecured rating of the 2021 notes and 2022 notes issued by Alam Synergy Pte. Ltd., a wholly owned subsidiary of the issuer, to Caa3 from Caa1 and placed the ratings on review for further downgrade.

The notes are guaranteed by the developer and most of its subsidiaries. At the same time, Moody’s has assigned a (P) Caa1 rating to the proposed 2024 and 2025 senior secured notes to be issued by Alam Sutera and placed them on review for downgrade.

The proposed notes are guaranteed by most of Alam Sutera‘ subsidiaries and will be secured by a mortgage over the Mall@Alam Sutera land lot and a commercial land lot. The outlook has been changed to ratings under review from negative.

The rating actions follow Alam Sutera’ announcement on Sept. 29, 2020 of an exchange offer for its outstanding US dollar bonds, namely its $115 million 11.5 percent bonds due April 2021 and $370 million 6.625 percent bonds due April 2022.

All of the 2021 bonds will be exchanged for new 2024 bonds, while 25 percent of the 2022 bonds will be exchanged for new 2024 bonds and the remaining 75 percent for new 2025 bonds. The exchange offer will only be successful if 85 percent of both the 2021 and 2022 bondholders choose to participate.

“The corporate family rating has been placed on review for downgrade to reflect the likelihood that the rating will be downgraded by multiple notches should less than 85% of bondholders participate in the exchange offer. The company’ current capital structure is not sustainable and is exposed to increased refinancing risk associated with Alam Sutera’ 2021 notes, as the company is reliant on external funding but has been unable to secure committed funds to meet the debt maturity,” says Jacintha Poh from Moody’s.

She continued, “The downgrade of the existing bond ratings reflects our expectation of significant economic loss to the existing bondholders even if the exchange offer is successful. The economic loss could be higher in absence of the exchange offer, a possibility incorporated in a further review for downgrade,” adds Poh.

Moody’s views the exchange offer as a distressed exchange because the transaction allows Alam Sutera to avoid an eventual default on its US Dollar notes since the company does not have sufficient funds to address the maturity in April 2021. The transaction will also result in significant economic loss for investors when compared to the original payment promise for the notes.

Assuming 85 percent of bondholders choose to participate in the exchange offer, Alam Sutera could be left with around $17.25 million of the 2021 bonds and $55.5 million of the 2022 bonds. In this scenario, Alam Sutera’ impending refinancing risk will improve but not be eliminated because of the $55.5 million coming due in April 2022.

Moody’s estimates the company would have sufficient cash to repay the $17.25 million due April 2021. As of 30 June 2020, the company held cash and cash equivalents of around Rp1.12 trillion ($75.65 million). This cash balance is also sufficient to cover the agency expectation of approximately Rp250 billion of operating cash outflow and around IDR200 billion in capital spending over the next 18 months.

Moody’s expects Alam Sutera‘ financial metrics will weaken in 2020 and stay weak in 2021, driven by a reduction in land sales. Leverage, as measured by debt/homebuilding EBITDA will be around 15.0x in 2020 and 10.0x in 2021 while EBIT interest coverage will be less than 1.5x in 2020-21. For the 12 months ended 30 June 2020, Alam Sutera had leverage of 4.7x and EBIT interest coverage of 1.9x.

The review will focus on the completion of the exchange offer. Moody’s could affirm the issuer’ CFR at Caa1 if the exchange offer is successful resulting in an improvement in company’s capital structure with manageable refinancing risk over the next 12-18 months.  On the other hand, Moody’s could downgrade Alam Sutera’s CFR if the exchange offer is not successful.

Moody’s could also further downgrade the senior unsecured ratings on the existing 2021 and 2022 bonds if there is a likelihood that the expected losses will be higher than those implied by the Caa3 rating. Alam Sutera established in November 1993 and listed on the Indonesian Stock Exchange in December 2007.

The company 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 31 December 2019, the family of The Ning King owned around 47 percent of the issuer.

US$1: Rp14,800

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