The weakening of the rupiah against the US dollar and rising interest rates is affecting property developers. Moody's Investors Service warned PT Alam Sutera Realty Tbk faces refinancing problems for its US$ 235 million foreign currency debt that will mature in March 2020. The company's liquidity is predicted to weaken in the next 12-18 months.
On 12 September, Moody’s gave its B2 rating for Alam Sutera Group and senior notes issued by Alam Synergy Pte Ltd that will mature in 2020 and 2022, and revised Alam Sutera’s debt rating outlook from Stable to Negative.
Moody’s Vice President and Senior Analyst Jacintha Poh said the outlook revision reflects the rating agency’s expectations of a significant weakening of the company’s liquidity in the next 12-18 months. “Alam Sutera faces potential financing risks as it does not have a concrete plan for debt securities due in 2020.”
Alam Sutera faces challenges to enter the financial market amid the weakening of the rupiah and rising lending rates. It had a cash and cash equivalent of Rp 904 billion as of 30 June 2018. Moody’s estimates it can collect cash of Rp 1 trillion-Rp 1.7 trillion from its operations in the next 12-18 months.
Alam Sutera requires Rp 3.5 trillion in funds with a yield-to-maturity of 11 percent for refinancing debt due in 2020.
Moody’s said Alam Sutera’s performance will remain healthy, supported by land sales to China Fortune Land Development Co Ltd (CFLD), absorption of the Lloyds project that has reached more than 90 percent, and sales of commercial land.
Contributions from the three segments were Rp 2.4 trillion from the company’s total marketing sales of Rp 3 trillion as of June 2018. Alam Sutera is predicted to achieve this year’s marketing sales target of Rp 4 trillion, surpassing Moody’s projection of Rp 3.3 trillion.
Moody’s also noted Alam Sutera’s financial indicators will weaken in the next 12-18 months, as the adjusted debt/homebuilding EBITDA hit 3.9 times and homebuilding EBIT/interest expense was 3.8 times in June 2018.
According to Poh, Alam Sutera’s rating can return to stable if it succeeds in refinancing its US$ 235 million debt due in March 2020. It must also execute its business plans, especially land sales to CFLD, and maintain financial indicators such as adjusted debt/homebuilding EBITDA below five times and adjusted homebuilding EBIT/interest expense above two times.
Alam Sutera Corporate Secretary Tony Rudiyanto said the company had conducted hedging to overcome the risk of rupiah depreciation against its dollar debt. “The position of the company’s dollar bonds is currently at US$ 480 million, while our hedging was more than US$ 480 million,” Tony said during the Investor Summit 2018.
Debt securities issued by Alam Synergy Pte Ltd consist of senior notes worth US$ 235 million due in 2020 and senior notes worth US$ 245 million due in 2022. These senior notes in US dollars were issued for land purchase, as bank debt is not allowed to be used.
In the first half of 2018, Alam Sutera recorded an exchange rate loss of Rp 285.84 billion compared to exchange rate profit of Rp 33.48 billion in the first half of 2017. According to Tony, the loss was non-cash and unrealized.
The company still has enough time for refinancing because the bonds are due in two years. “It plans to refinance the bonds due in 2020, but refinancing costs are quite expensive at this time,” he said.
He added dollar bond yields that attract foreign investors are high, even though the bond coupon owned by the company is now at 6.95 percent and 6.625 percent. This is why Alam Sutera chose refinancing next year. It also has land reserve assets of 2,200 hectares (ha) worth Rp 30 trillion, which is more than enough to guarantee its debt.
Tony said the company remains cautious in investing. Alam Sutera is restraining land purchases as it still has many land banks, and has not started investing in new buildings due to oversupply in the office building market. It is currently marketing The Tower, a 50-storey office building with an estimated sales value of Rp 2.3 trillion.
During the launch of the Indonesian Property Chartbook on 4 September, Moody’s said the property sector in Indonesia faces challenges in 2019. “Although demand for property is recovering, the weakening of the rupiah, rising interest rates, and political risks ahead of the 2019 elections can restrain the interest of potential property buyers,” Poh said.
Some developers have carried out large-scale promotions for newly launched projects and cut inventory. This is predicted to make marketing sales not too high.
Moody’s also estimates developers in Indonesia will show weak liquidity in the next 12 months. Five out of eight developers have insufficient cash conditions to cover short-term debt payments.
Nevertheless, most of the short-term debt is rupiah-denominated, where developers usually have a good track record to extend the debt.
Fitch Ratings also highlighted the vulnerability of developers in Indonesia against rupiah depreciation. The average portion of debt in US dollars is 50 percent of total developer debt.
As reported by D-Inside, PT Lippo Karawaci Tbk (LPKR) is the most vulnerable property company over the weakening rupiah. At the end of last year, Lippo had foreign currency worth US$ 13 million, while the interest payment for this year’s debt is US$ 65 million.
Fitch also said Alam Sutera had foreign exchange of US$ 8 million at the end of 2017, while the interest expense to be paid was US$ 33 million. However, the rating agency believes Alam Sutera has a sufficient hedging agreement to pay the principal of its dollar bonds.