Moody's: Indonesian Property Developers Face a Higher Interest Burden
Property Assets owned by PT Agung Podomoroland Tbk in North Jakarta - Photo by Agung Podomoroland

JAKARTA (TheInsiderStories) – Moody’s Investors Service in a new report that the eight Indonesian property developers , seven will likely have the capacity to absorb a higher interest burden at their current rating levels, told  a senior officer Tuesday (02/12).

The higher costs will weaken interest coverage of rated developers but only Lippo Karawaci Tbk (B3 negative) does not have the capacity to absorb a higher interest burden at its current rating.

“Indonesian property developers face increasing funding costs, against the backdrop of upcoming debt maturities, because both onshore and offshore interest rates have risen in the last 12-18 months,” said a Moody’s Vice President and Senior Credit Officer Jacintha Poh.

As of 30 September 2018, around 30 percent of the developers’ aggregated debt would mature from the fourth quarter of 2018 through 2020.

The Intiland Development Limited Tbk (B2 stable) had around 70 percent of debt maturing in this period. While, Alam Sutera Realty Tbk (B2 negative) and Sentul City Tbk (B2 stable) each had around 50 percent, Pakuwon Jati, Tbk (Ba2 stable) and Agung Podomoro Land (B1 stable) each had around 30 percent,

In Addition, Bumi Serpong Damai Tbk (Ba3 positive) and Lippo Karawaci each had around 15 percent, and Modernland Realty Tbk (B2 stable) had less than 5 percent.

“The higher costs will weaken the rated developers’ interest coverage, although seven of the eight companies should have the capacity to absorb a higher interest burden without affecting their ratings,” she added.

Rising costs will weaken rated developers’ interest coverage. Assuming the developers refinance all debt maturing between 4Q 2018 and 2020 at a higher cost reflective of today’s yields, Moody’s expects Alam Sutera Realty Tbk pro-forma interest burden will increase around 15 percent, the most among the developers.

The remaining companies’ pro-forma interest burden will increase between 1 percent and 10 percent. However, Moody’s expects Alam Sutera to have the capacity to absorb a higher interest burden because its interest coverage was the strongest among the B-rated companies to begin with.

Meanwhile, the rupiah’s depreciation is an additional risk that can further weaken interest coverage. A depreciation of the rupiah against the US dollar in conjunction with rising interest rates would exacerbate pressure on interest coverage. In such a situation, we expect Lippo Karawaci Tbk (B3 negative) to run out of cash sources to cover its cash needs before June 2019, unless it takes steps to improve liquidity.

But, Moody’s points out that because more than 60 percent of the rated Indonesian property developers’ aggregated debt is in US dollar, with their revenue earned in rupiah, a depreciation of the rupiah against the US dollar amid rising interest rates would exacerbate pressure on the companies’ interest coverage.

Therefore, for onshore debt, Moody’s assume a 1.75 percentage-point increase in interest rates for debt maturing between 4Q 2018 and 2020, in line with Bank Indonesia’s rate hikes in 2018. And for offshore debt, we assume that the maturing debt is refinanced at the current Yield to Maturity (YTM) on their outstanding bonds.

“We expect aggregated interest expense for the rated developers to increase by 6 percent in 2020 on a pro-forma basis from level for the 12 months ended 30 September 2018. The increase in interest expense will result in a moderate weakening in aggregated interest coverage to 3.0 times in 2020 on a pro-forma basis from 3.2 times for the 12 months ended 30 September 2018,” she concluded.

Written by Daniel Deha, Email: daniel@theinsiderstories.com