Bangkok--29 Jul--Standard & Poor's
- Indonesia-based property developer MDLN has a small scale, volatile cash flows, and an aggressive appetite for debt-funded expansion.
- The company's established record in township development and scalable business model temper these weaknesses.
- We are assigning our 'B' long-term corporate credit rating and 'axBB-' ASEAN regional scale rating to MDLN. We are also assigning our 'B' issue rating to the company's proposed senior unsecured notes.
- The stable outlook reflects our expectation that MDLN will have strong sales, stable margins, and acquire a remaining stake in JGC.
SINGAPORE (Standard & Poor's) July 29, 2013--Standard & Poor's Ratings Services today assigned its 'B' long-term corporate credit rating to Indonesia-based property developer PT Modernland Realty Tbk. (MDLN). The outlook is stable. We also assigned our 'axBB-' long-term ASEAN regional scale rating to MDLN.
At the same time, we assigned our 'B' long-term issue rating to a proposed issue of senior unsecured notes by Modernland Overseas Pte. Ltd. MDLN guarantees the notes. The issue rating is subject to our review of the final documentation.
The corporate credit rating incorporates our expectation that MDLN will acquire the remaining 51% stake in Jakarta Garden City (JGC) township development from its joint venture partner Keppel Land (not rated) in the third quarter of 2013. Our projections factor in a successful bond issuance, with the bulk of the proceeds to be used for this acquisition and the balance for refinancing.
MDLN is a diversified property real estate developer with industrial and residential township projects in and around Jakarta. It currently sells most of its products and has minimal recurring income.
"The rating on MDLN reflects the company's aggressive appetite for debt-funded expansion and its exposure to the Indonesian property market," said Standard & Poor's credit analyst Kah Ling Chan. "Companies in this market typically have volatile cash flows from property development and large capital expenditures for acquisition of land to sustain growth. The rating also incorporates MDLN's small scale, high concentration risks, and limited record in consistent financial management. MDLN's solid foothold in West Jakarta, scalable business model, and good operating efficiency with a high asset turnover temper these weaknesses."
In our view, MDLN faces high risk in executing its new projects. Rapid expansion could test MDLN's financial and operational capabilities. The company targets to expand quickly from a small base and triple its revenue over the next two years.
"We expect MDLN to maintain its operating efficiency to support its business model. The company uses a simple build-and-sell model. It can start presales within 12 months of obtaining approvals," Ms. Chan said.
The stable rating outlook reflects our expectation that MDLN will generate strong property sales, stable margins, and acquire the remaining stake in JGC. These factors will offset the higher debt in the next 12 months. We also expect MDLN to maintain prudent financial management while pursuing its expansion strategy.
We may lower the rating if MDLN deviates from its core business and strategy, makes larger-than-expected debt-funded land acquisitions and expansion, or the company's contract sales in 2013 are substantially below our expectations. A debt-to-EBITDA ratio above 4.5x indicates such weaknesses.
The rating upside in the coming 12 months is limited, as we expect MDLN will increase its total debt for aggressive land acquisition and project expansion. However, we may raise the rating if MDLN expands its scale and improves diversity, and establishes a consistent record of operational performance and disciplined financial management while pursuing high growth.