OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based PT Multipolar Tbk's (Multipolar) Long-Term Issuer Default Rating at 'B+' with Stable Outlook. The agency has also affirmed Multipolar's senior unsecured rating at 'B+' and USD230m notes due in 2018 at 'B+' and Recovery Rating of 'RR4'. The notes are issued by Pacific Emerald Pte Ltd, a wholly owned subsidiary, and guaranteed by Multipolar and certain subsidiaries.

At the same time, Fitch Ratings Indonesia has assigned Multipolar a National Long-Term Rating of 'A(idn)' with Stable Outlook.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Structural Subordination: Multipolar's rating reflects the subordination of its cash flows due to its holding company structure. Most of its cash flows are from dividends from 50.2%-owned hypermarket operator PT Matahari Putra Prima Tbk (MPPA, unrated) and 20.5%-owned PT Matahari Department Store Tbk (MDS, unrated). Therefore, Multipolar's ability to meet its debt obligations depends on dividends from MPPA and MDS. We believe both MPPA and MDS will continue to be able to pay Multipolar dividends over the medium term, driven by both companies' favourable operating performance and strong financial profile.

Weak Fixed Charge Cover: Fitch expects Multipolar's deconsolidated fixed charge cover (ratio of funds flow from operations from wholly owned entities plus dividends to sum of interest expense and rents) to remain below 2x over the next 24 months. This is lower than Fitch's initial expectation, mainly due to underperformance at PT Indonesia Media Televisi (IMTV) and the retail business in China. IMTV is a satellite TV operator using the BIG TV brand. Fitch does not expect a strong turnaround in IMTV's cash generation in the short term, and consequently IMTV will continue to weigh on fixed charge cover, which is likely to remain below 2x over the medium term.

Multipolar's overall credit profile remains consistent with the current rating because the weaker fixed charge cover is mitigated by MPPA and MDS' strong operating and financial profile, well-distributed debt maturity, and access to cash at other fully owned entities. In addition, the long-term outlook for the retail industry in Indonesia is favourable and Multipolar has demonstrated it was able to maintain sufficient fixed charge cover during weak operating conditions from 2014 onwards. Fitch has reduced the fixed charge cover level at which it would consider negative rating action to 1.25x from 2x initially.

Strong Profiles of MPPA, MDS: Multipolar's rating is primarily supported by the profiles of MPPA and MDS. MPPA, which operates the Hypermart and Foodmart food retailing chains, is one of the largest retailers in Indonesia. MPPA has no bank or bond debt, and has achieved margin stability despite competitive pressure. MDS's profile is supported by high profitability, low leverage, and low inventory risks from the consignment business model. Both entities performed well, relative to peers, in particularly challenging macroeconomic conditions during 2014 through 1Q15.

Expansion Scaled Back: Indonesian consumer sentiment is weak, with GDP growth at its slowest in five years. Multipolar has reined in the increase in the number of outlets for Hypermart and Foodmart in response to the weak market. The company plans to add 15 new Hypermart stores a year in the next two to three years versus 20 previously, and at least maintain the total retail space for Foodmart. Multipolar has also decided to discontinue the Hipermart business in China following negative cash flows over the past five years.

IMTV Cash Flows Negative: Management now expects IMTV will only turn cash flow positive in 2016, compared with an initial expectation of 2015. Management expects to break even when subscribers reach 1 million. IMTV is competing against Indovision, which has first-mover advantage in the Indonesian satellite TV market with about 1.6 million subscribers to date. IMTV will require external financing to continue operations until it reaches sufficient scale and reverses the negative cash flows. Its management has secured a working capital facility to fund about two years of operations.

FX Exposure Mostly Hedged: Multipolar has hedged USD180m out of its USD230m bonds outstanding, and has USD53m in cash. Management is committed to fully hedge the principal amount of its US dollar bonds. Although the company is exposed to fluctuations from coupon payments, Fitch believes risk is mitigated by sufficient fixed charge cover from strong dividends from MDS and MPPA.

Contingent Liability to Temasek: Under the terms of an alliance agreement with Singapore's Temasek Holdings, if MPPA fails to meet Temasek's operating performance targets, Multipolar will have to pay Temasek any shortfall on its USD300m investment upon the latter's exit from MPPA. However, given the current favorable retail market outlook, the risk of this liability crystallising is, in Fitch's view, not high. As of 6 July 2015, Temasek's 26.1% indirect shareholding at MPPA was worth about USD327m.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- MPPA opens half the management's target for new Hypermart stores in 2015 and 2016
- Stable productivity of IDR2.8m/sqm for Hypermart stores
- MPPA dividend payout rate of 30%
- MDS dividend payout rate of 50%

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Fixed charge cover below 1.25x on a sustained basis. This may result from lower than expected dividends or deterioration in the performance of non-core businesses.

Positive: No positive rating changes are expected in the medium term because of the company's high investment commitments at its non-retail subsidiaries.