PT Alam Sutera Realty Tbk. #B# Rating Affirmed On Likely Timely Resolution Of Technical Outlook Stable

Stocks and Financial Services Press Releases Wednesday October 11, 2017 16:42
SINGAPORE--11 Oct--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Oct. 11, 2017--S&P Global Ratings affirmed its 'B' long-term corporate credit rating on PT Alam Sutera Realty Tbk. (ASRI). The outlook is stable. We also affirmed our 'B' long-term issue ratings on the senior unsecured notes issued by Alam Synergy Pte. Ltd. ASRI is an Indonesian property developer and guarantees the notes.

We affirmed the ratings despite ASRI's breach of its restricted payment covenants because we expect the company to swiftly and successfully resolve this technical breach. Given the small amount of dividend involved, we believe that bondholders will not call an event of default. In addition, ASRI continues to perform in line with our expectations and maintains adequate near-term liquidity.

We believe ASRI will solicit consent from bondholders for waiver of the breach to address the breach in a timely manner. ASRI triggered the restricted payment covenant breach by mistakenly disbursing Indonesian rupiah (IDR) 29 billion of dividends in July 2017 despite failing the fixed charge coverage ratio of at least 2.5x for the 12 months ended June 30, 2017.

We believe ASRI will meet the fixed charge coverage covenant for the 12 months ended Sept. 30, 2017, because its operating performance is better than in 2016. The company's operating performance in the first half of 2017 is in line with our expectations. Its marketing sales were IDR895 billion in the first six months of 2017. We therefore believe that the company will be able to meet our sales and financial ratios expectations for the rating for 2017 and 2018.

ASRI continues to maintain adequate liquidity to meet the cost of potential consent solicitation. The company has a cash balance of IDR1.15 trillion as of June 30, 2017.

The stable outlook reflects our expectation that ASRI will resolve the covenant breach in a timely manner. We also expect the company to maintain sustained marketing sales and disciplined capital expenditure over the next 12-18 months such that its EBITDA interest coverage remains above 2x. In addition, we anticipate that ASRI will manage its liquidity by selling land or assets, or reducing capital expenditure if the market weakens.

We may lower the rating, most likely by more than one notch, if ASRI fails to resolve the breach in a timely manner, such that bondholders are compelled to trigger an event of default, which will accelerate debt repayment.

We may also lower the rating if one or more of the following occurs: ASRI's liquidity deteriorates substantially. This could materialize if market conditions weaken substantially and affect cash collections significantly more than we anticipated, while capital spending stays high; or ASRI increases its reliance on short-term working capital funding.The company's EBITDA interest coverage falls below 2x because of lower margins or rising interest costs. The credit profile of parent Argo Manunggal Group weakens because of more aggressive debt-funded expansion or weaker profitability at the group.ASRI engages in substantial related-party transactions or develops closer operating and financial relationships with Argo Manunggal or its sister companies.

We may raise the rating if ASRI materially improves its debt servicing ability and adequate liquidity. An indication of this improvement would be EBITDA interest coverage staying materially above 3x and liquidity uses being well covered by liquidity sources. For either of these scenarios to occur, ASRI would need to practice financial prudence, reining in its capital expenditure.

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