Singapore, July 29, 2013 -- Moody's Investors Service has assigned a provisional corporate family rating of (P)B2 to PT Modernland Realty Tbk (Modernland).

Moody's has also assigned a provisional senior unsecured bond rating of (P)B2 to the proposed senior unsecured notes to be issued by Modernland Overseas Pte Ltd -- an entity wholly owned by Modernland -- and guaranteed by Modernland and its subsidiaries.

The ratings outlook is stable.

This is the first time Moody's has assigned ratings to Modernland.

The provisional status of the ratings will be removed upon the completion of the bond issuance and Modernland's proposed acquisition of a 51% stake in PT Mitra Sindo Sukses (MSS) and PT Mitra Sindo Makmur (MSM),-- together known as Jakarta Garden City (JGC) -- from Keppel Land Limited (unrated). Modernland currently owns a 49% interest in MSS and MSM.

Modernland plans to use the proceeds from the issuance for the JGC acquisition and to repay some of its existing bank debt.

RATINGS RATIONALE

The (P)B2 ratings reflect the transition in Modernland's business profile to encompass the development of industrial towns and residential townships, where its track record to date has been limited. Although exposure to price and market risks remain, Modernland's projects have relatively low development risk.

In January 2012, Modernland acquired Modern Cikande -- an industrial estate in the western region of Greater Jakarta -- from a related party. Prior to the acquisition, the company was mainly focused on its flagship township project, Kota Modern, in Tangerang, Greater Jakarta.

"After the acquisition of JGC, the company will have access to a healthy land bank, resulting in an aggregate development life of about 10 years. It will be well-positioned to benefit from positive industry dynamics of the industrial as well as the residential sectors in Jakarta," says Jacintha Poh, a Moody's Analyst.

"While the addition of JGC will fundamentally transform Modernland, we remain concerned about its ability to execute the JGC project without its larger and more experienced partner, Keppel Land, given its lack of track record in executing projects of this magnitude", adds Poh, who is also the Lead Analyst for Modernland and other companies in the Indonesian property sector.

Modernland's land bank was 1,231 hectare (ha) as at 31 March 2013, excluding 238 ha at JGC but including 503 ha at Modern Cikande.

JGC is a 265 ha premier, integrated township project in Cakung, East Jakarta, established in 2005 as a joint venture between Modernland and Keppel Land. It is currently at a relatively young stage of development with basic infrastructure in place and four residential clusters launched thus far.

"JGC will drive the company's growth in the residential segment in the next two years, while Modern Cikande will steer growth in the industrial segment. In addition, while the land acquisitions at Modern Bekasi will provide a longer-term growth plan for the company, we do not expect the project to generate meaningful cash flow until 2015," adds Poh.

Ratings are constrained by Modernland's small scale and lack of geographical diversity outside Greater Jakarta. The firm also lacks a source of recurring income, and has a history of debt restructuring during the 1997/1998 Asian crisis.

In addition, its projected free cash flow is likely to remain negative in the next two years owing to land acquisitions at Modern Cikande and Modern Bekasi -- a new industrial project east of Jakarta -- to replenish its industrial land bank. Nonetheless, the timing of the land acquisition and therefore most of the cash outflow remains at the company's discretion.

Approximately 40% of Modernland's cash inflows this year are expected to be derived from a land-sale agreement with Alam Sutera (B1 stable), which supports liquidity, but also entails significant counterparty credit risk. In February 2013, Modernland agreed to sell 170 ha of land in Tangerang to Alam Sutera for IDR3.4 trillion ($347million) across 30 months and has already received IDR700 billion in 2013 so far.

Modernland had cash on hand of IDR711 billion ($73 million) as of end-March 2013.

The stable outlook reflects Moody's expectation that Modernland will achieve its sales target and grow its operational cash flow, build track record around executing the JGC project and maintain financial discipline when pursuing growth.

Upward rating pressure is unlikely over the near to medium term, but could emerge if Modernland can roll out its expansion strategy successfully, supported by sustained improvements in sales performance and positive free cash flow generation, as well as by solid liquidity in the form of cash balances and committed facilities. Credit metrics that will support an upgrade include adjusted EBITDA/interest coverage above 4.0x, adjusted leverage below 45%, adjusted debt/EBITDA below 3.5x and total revenue of more than IDR4.0 trillion on a sustained basis.

On the other hand, downward pressure could emerge if Modernland's financial and liquidity profiles weaken owing to: (1) problems with implementing its business plan and difficulty meeting its sales targets, particularly at JGC; (2) weakening of the property market in Indonesia; and (3) a weakening of Alam Sutera's credit profile, such that its ability to service installment payments on land purchases from Modernland is affected. Adjusted EBITDA/interest coverage of less than 2.0x, adjusted leverage of above 50%, adjusted debt/EBITDA at above 5.0x, total revenue less than IDR1.8-2.0 trillion and negative free cash flow on a consistent basis could also trigger a downgrade.

The principal methodology used in these ratings was the Global Homebuilding Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Established on 8 August 1983, Modernland is an integrated property developer in Indonesia that focuses on industrial town development, residential development, township development and has small exposures to the hospitality and commercial property segments. It was listed on the Jakarta Stock Exchange in 1993, and is 63% owned by the Honoris Family through direct ownership and various holding companies, including a 16.6% stake held by AA Land Pte Ltd (unrated).