S&P Ratings: Indonesian Developers Potentially to Downgrade This Year

JAKARTA (TheInsiderStories) – The hustle and turmoil of the 2019 General Election has dragged the Indonesian property market which has reached a “safe point” so far. Sluggish income and sticky spending needs can further reduce the financial buffer for developers in Indonesia, which causes a downgrade, told the Standard & Poors (S&P) Global Ratings today (02/27).

The agency believes that the depletion of financial support can push Indonesian property developers into the downgrade region, especially in the first quarter (1Q) of 2019 ahead of the April 17 presidential election. But, most property sales will be re-loaded into the second round, with plans to launch new and more affordable residential units.

“Slow property sales in Indonesia add to the risk of tighter liquidity and higher borrowing costs,” said S&P credit analyst Kah Ling Chan in an official statement.

According to S&P, to offset the slower sales of the property units, some developers sell their land to get cash. But, this tactic doesn’t prevent a general setback in major credit metrics, such as EBITDA interest rate coverage.

Specifically for PT Pakuwon Jati Tbk (BB/Stable), all ranked developers in our universe have a thin liquidity buffer. Pakuwon’s recurring income significantly provides operational stability and cash flow to the business cycle that is not stable in property development.

But in the case of PT Lippo Karawaci Tbk (CCC+/Negative), S&P estimated that without strategic steps, the company could run out of cash within six months.

Indeed, although several entities such as PT Alam Sutera Realty Tbk (Watch Neg), PT Kawasan Industri Jababeka Tbk (B/Stable) and PT Modernland Realty Tbk (B/Stable/–) have sufficient liquidity for 2019, its financial flexibility is also limited due space for large and future agreements or debt payments.

Furthermore, S&P predicts that most developers don’t face the risk of immediate payments, given that maturity is limited to 2019 and 2020. However, high funding costs and adverse risk appetites will make it difficult to refinance long-term debt as it approaches maturity.

“While the maturity of staggering debt gives Indonesian developers breathing space, we see a weakening of debt servicing ability as a potential trigger for further declines in 2019,” said S&P credit analyst Fiona Chen.

But, based on S&P views, most Indonesian developers have not faced major refinancing risks in 2019 and 2020. Alam Sutera, however, has $70 million due in March 2020, and Lippo Karawaci $125 million is due in the second quarter of 2020.

Funding conditions are no longer as profitable as two years ago. This is partly due to the knock-on effect of China, where tight funding and leverage conditions have caused Chinese developers to increasingly switch to short-term foreign bond markets, and issue new newspapers at higher costs.

On the other hand, Indonesian developers also face higher demands for returns, with funding costs soaring to above 10 percent, while tenure preferences have been shortened to three years or less.

S&P considers that the domestic Indonesian bond market cannot absorb large bond issuance and therefore property developers continue to depend on foreign markets. The rater also noted, this time windows for refinancing was shorter compared to five years ago, when developers usually refinance at least 24 months before the maturity of the note.

For an example, in 2018, Modernland finished refinancing of $58 million in 2019, 12 months before maturity. Similarly, Alam Sutera partially refinanced $235 million in 2020, a record 14 months before maturity, leaving $70 million to be refinanced this day.

But this route is uncertain, because most developers have no record of securing large bank loans with long tenors. In addition, these loans require asset guarantees, so they are not the preferred funding source for developers.

Therefore, according to S&P, market conditions in Indonesia must trigger a new strategy and developers mixed the products. Indonesian regulator has eased loan-to-value requirements in August 2018 for the first mortgage. This will help increase home ownership.

“We believe changes in the product mix can increase sales volumes for developers. Affordable housing is increasingly popular, and we hope this trend has endurance,” said S&P analysts.

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