OREANDA-NEWS. Fitch Ratings has published Indonesia-based property developer PT Bumi Serpong Damai Tbk's (BSD) Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook. The agency has also assigned an expected rating of 'BB-(EXP)' to the company's proposed five-year US dollar notes, issued by Global Prime Capital Pte Ltd (a wholly owned subsidiary of BSD), and guaranteed by BSD and its subsidiaries. The final rating on the notes is contingent upon the receipt of final documents conforming to the information already received. A full list of ratings is at the end of this commentary.

The proposed notes will rank pari passu with senior unsecured obligations of BSD and its key subsidiaries. Fitch expects BSD's secured debt/EBITDA to remain below 2x-2.5x (end-2014: 1.6x), a threshold beyond which the agency will consider notching the bond rating below BSD's Long-Term IDR.

At the date of the indenture, subsidiaries that together account for 90% of BSD's consolidated EBITDA will guarantee the bond. The remaining material subsidiaries, including its listed subsidiary PT Duta Pertiwi Tbk (Duta), will be restricted subsidiaries, and will be subject to restrictive covenants that prevent any meaningful subordination of potential bond investors. Because of these reasons, Fitch has rated the proposed bond at the same level as BSD's Long-Term IDR.

KEY RATING DRIVERS
Strong Financial Profile: BSD has a track record of maintaining a conservative financial profile. Its cash reserves exceeded its debt in 2008-2013, while its leverage (measured as debt net of unrestricted cash to the sum of inventory, land bank, advances paid for land, less customer sales advances) has remained low at other times. Fitch expects BSD's leverage to remain below 25% over the medium term even though it plans to add to its land bank. BSD's end-2014 EBITDA margin of 50% is strong compared to regional and domestic peers. Although EBITDA margin is likely to decline due to a lower proportion of landed property in its sales mix, Fitch expects the company to maintain EBITDA margins of more than 40% over the medium term.

Geographic Concentration: Fitch expects BSD to generate more than 50% of its cash flow from its BSD City township over the medium term. This limits the company's ability to discount its inventory to speed up sales and increase liquidity in a downturn, as it could impair the future profitability of a large part of its development book. However this risk is mitigated by the products within BSD City that target different price points and both the residential and commercial segments. The diversity may help the company to offer discounts on some products, if needed.

Good Quality Investment Property Portfolio: Significant recurring cash flow is generated from BSD's investment property income stream, which provides strong interest coverage (2014: 2.0x; 2015 projection: 2.2x). This mitigates the higher risk of its property development business, which is more volatile across economic cycles. At end-2014 BSD controlled 18 investment properties, which comprised of two hotels, as well as its ITC-branded retail malls, large-scale mixed-use developments, and office buildings. Average occupancy in its malls and office buildings stood at 90% in 2014, while occupancy at its hotels was 63%. Fitch expects occupancy to remain healthy over the medium term. BSD has another 14 investment properties under development that will start adding to its recurring EBITDA over the medium term.

Good Project Execution, Large Land Bank: BSD has a track record of maintaining high sales turnover, with presales/gross debt at 1.5x in 2014. This reflects its strong brand and good execution of its projects compared to domestic peers. BSD is the largest property developer in Indonesia in terms of presales. Its land bank available for development of around 45 million square meters is large compared to regional peers, and provides BSD with more than a decade of development potential. In 2014, BSD sold more than USD500m worth of properties, and Fitch expects presales to increase by a compounded annual growth rate of 15%-20% through 2017. Most of the company's land bank was acquired at low cost, which supports its ability to maintain healthy profit margins.

Senior Unsecured Debt Not Notched: Fitch's senior unsecured rating of 'BB-' is based on average recovery in a distressed scenario, despite senior unsecured creditors ranking behind secured creditors. Fitch expects BSD's prior-ranking debt/EBITDA to remain below 2.0x-2.5x, a threshold above which we may consider notching senior unsecured debt below the IDR.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- EBITDA margins will be sustained at over 40%
- Annual presales growth will hover in the mid-teens through 2017
- Leverage will increase in 2015 due to the proposed bond issue, but improve thereafter
- Free cash flow will be neutral to negative over the medium term

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include
- Leverage sustained above 40% (2014: 10%)
- Presales / gross debt sustained below 1x (2014: 1.5x)
- Investment property EBITDA / cash interest costs sustained below 1.75x (end-2014: 2.0x)

Positive: Fitch doesn't expect a rating upgrade over the medium term because of the concentration of BSD's cash flows in the Tangerang region in the Greater Jakarta area, primarily through its sales in BSD City, as well as the company's smaller development scale compared to regional peers.

FULL LIST OF RATING ACTIONS

PT Bumi Serpong Damai Tbk
- Long-Term Foreign Currency Issuer Default Rating published at 'BB-'; Outlook Stable
- Long-term senior unsecured debt class rating published at 'BB-'

Global Prime Capital Pte Ltd
- Proposed five-year senior unsecured US dollar bonds assigned 'BB-(EXP)'