Standard & Poor's Ratings Services (S&P) today assigned its B long-term corporate credit rating and 'axBB-' ASEAN scale rating to Indonesia-based real estate developer PT Alam Sutera Realty Tbk. The outlook is stable.
At the same time, S&P also assigned a B issue rating to the proposed senior unsecured notes by Alam Sutera International Pte Ltd, a special purpose vehicle set up to issue the notes.
Alam Sutera's subsidiaries guarantee the notes. The issue rating is subject to our review of the final documents.
"The rating on Alam Sutera reflects the company's aggressive debt-funded expansion, high project concentration, and execution risks for a proposed hospitality venture in Bali, Indonesia," said Standard & Poor's credit analyst Kah Ling Chan.
"The company's large, low-cost, and well-located land bank, strong growth potential, and good record of developing the Alam Sutera township in Indonesia temper these weaknesses."
In our view, the single-project concentration risk is material despite the company's diversification efforts.
The Alam Sutera township, which is west of Jakarta, will continue to contribute the bulk of property sales in the next two years. The company has launched its second project but contributions are likely to remain limited.
Alam Sutera benefits from the good location and reputation of the project, as well as low land costs.
"We expect Alam Sutera to increase its debt aggressively over the next two years, albeit from a low level, to fund land acquisitions and new projects, Chan said.
In January 2012, the company raised Rp786 billion in a sale of shares for land bank acquisition.
The proposed issue of up to US$150 million in senior unsecured notes for buying more land will further increase debt to IDR2.8 trillion by the end of 2012 from an estimated IDR554 billion at the end of 2011.
The stable outlook reflects our expectation that Alam Sutera will generate satisfactory cash flows from property sales at good margins to partly mitigate the significant increase in borrowings in 2012.
The stable outlook also incorporates our expectation that the proposed bond issue will be successful, and the company will maintain adequate liquidity while expanding aggressively.
"In our base-case scenario, we expect the company's debt-to-EBITDA ratio to be about 2.9x and EBITDA interest coverage 4.4x in 2012."
"The potential upside to the rating is limited, in our view. We may raise the rating if Alam Sutera executes its high-growth strategy well, including replenishing its land bank at a low cost and generating good profitability from the Bali hospitality project."
S&P may also upgrade the company if it increases its operating scale and diversifies its cash flow sources to include a larger number of projects and property leasing.
The rating agency may lower the rating if Alam Sutera deviates from its strategy and core business of property development or makes larger debt-funded acquisitions than the agency expected.
The rating may also come under pressure if a cyclical slowdown materially reduces the company's property sales and lowers EBITDA margin to less than 40%.
Disclosure: No position at the stock mentioned above.
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