OREANDA-NEWS. Fitch Ratings has assigned Indonesia-based PT Bumi Serpong Damai Tbk's (BSD, BB-/Stable) proposed US dollar-denominated senior unsecured notes due in 2023 an expected rating of 'BB-(EXP)'. The notes will be issued by BSD's wholly owned subsidiary, Global Prime Capital Pte Ltd, and guaranteed by BSD and its subsidiaries.

The notes are rated at the same level as BSD's senior unsecured rating as they represent the company's unconditional, unsecured and unsubordinated obligations. The final rating on the notes is contingent upon the receipt of final documents conforming to information already received.

BSD intends to use part of the notes' proceeds to refinance its existing USD225m 6.75% senior unsecured notes due in 2020 and any balance to expand its businesses and for working capital. The proposed notes, which have a seven-year tenor, will lengthen BSD's debt maturity profile. Fitch expects BSD's financial profile to remain within the parameters of its 'BB-' Long-Term Issuer Default Rating, based on the company's appetite for raising additional debt via this issuance.

KEY RATING DRIVERS

Presales Outperform Peers: BSD's marketing sales improved 8% yoy in 2Q16, but fell 27% in 1H16 compared with the same period last year due to a weak 1Q16, as most Indonesian developers delayed property launches due to weak demand. We continue to expect the homebuilder to sell around IDR6.4trn of properties in 2016, which is close to the company's own target of IDR6.8trn. Marketing sales of the other six Fitch-rated Indonesian homebuilders fell by 47% in 1H16 and 32% in 2Q16, compared with their corresponding periods in 2015. BSD's diversity across property products and price points is a key driver of its performance, allowing the company to adjust its sales plans to match demand.

Strong Recurring Cash Flow: Investment properties (IP) generated around USD67m in EBITDA in 2015. The company owns 18 assets, including suburban retail malls catering to the mass market, a mix of prime and suburban office space and two resort hotels. While IP EBITDA growth has lagged Fitch's expectations due to slower ramp-up of some of BSD's newer properties, overall occupancy was strong at 95%. Asset concentration is modest, with the five largest IP assets accounting for 62% of IP revenue in 2015.

Subsidiary Owns Investment Property: Most of BSD's investment property is held through its 88.56%-owned listed subsidiary, PT Duta Pertiwi Tbk (DUTI). A significant dilution in BSD's ownership of DUTI, although not expected in the medium-term, may reduce BSD's access to DUTI's recurring cash flow and increase risk to BSD's creditors.

Solid Balance Sheet and Land Bank: BSD has a record of maintaining a strong balance sheet. Its leverage was just 16.8% at end-June 2016 and Fitch expects leverage to remain below 25% over the medium term. BSD's land bank amounted to 39.5 million square meters at end-2015. Uniquely, the title to around 63% of BSD's land bank is under the company founders' names, an arrangement dating back to the company's inception. A legally binding agreement confers the rights to developing the land to BSD. Fitch has excluded the portion of land under the founders' names from its leverage calculation to be conservative, but it should be noted that this agreement has not been breached since inception.

High Capex; Geographically Concentrated Sales: BSD expects to spend around IDR7trn between 2016 and 2018 on expanding its investment property portfolio to over 30 properties. Fitch expects execution risk to be mitigated by the company's record of successfully developing similar properties. BSD anticipates spending a further IDR1.5trn - IDR2.5trn on land banking annually until 2018. Nearly 70% of the company's presales were in within the BSD City township in the Serpong region outside Jakarta in 2015, but have been diversified across residential and commercial clusters.

KEY ASSUMPTIONS

Fitch's key assumptions include:

- Presales of IDR6.4trn in 2016

- Cash collection cycle on development projects to remain between two to three years on average, in line with current trends

- Investment properties to generate around IDR1.2trn EBITDA in 2016

- BSD to spend over IDR4trn on capex over 2016 and 2017 and around IDR4trn on land banking over the same period.

RATING SENSITIVITIES

Positive: Fitch does not expect BSD's ratings to be upgraded in the next two years due to its evolving investment property portfolio compared with higher-rated international peers and high capex and execution risks related to its investment property expansion.

The following factors may result in an upgrade over the longer-term:

-increased scale and granularity of BSD's investment property portfolio, so it generates EBITDA of more than USD120m, with the five largest assets accounting for less than 50% of revenue in this segment

-investment property EBITDA/net-interest expense higher than 2.5x (end-June 2016: 2.0x)

-leverage sustained below 30% (end-June 2016: 16.8%).

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-investment property EBITDA/net-interest expense sustained below 1.75x

-leverage sustained above 40%.

LIQUIDITY

Strong Liquidity: BSD had IDR5.6trn of readily available cash against IDR8.8trn of gross debt at end-June 2016, with IDR2trn of debt consisting of short-term secured working capital facilities, and a further IDR403bn of current maturities and capital leases. The company also has a further IDR750bn of approved but unutilised credit facilities outstanding.