OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based homebuilder PT Bumi Serpong Damai Tbk's (BSD) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. The agency has also affirmed the company's 'BB-' senior unsecured rating and the 'BB-' rating on its outstanding USD225m 6.75% senior unsecured bond, which is due in 2020. The US dollar bond is issued by BSD's subsidiary, Global Prime Capital Pte Ltd, and guaranteed by BSD.

The ratings affirmation reflects BSD's business profile as one of the largest Indonesian homebuilders, a strong recurring cash flow from its granular investment property portfolio and robust balance sheet with low leverage. The senior unsecured ratings reflect low subordination risk to this debt class because of the high coverage provided by BSD's unencumbered assets. This is why the senior unsecured rating is at the same level as the Long-Term IDR.

KEY RATING DRIVERS
2015 Presales Outperformed Peers: BSD's presales increased 5% during 2015 to IDR6.7trn, despite weak domestic property demand. In contrast, most domestic peers recorded decreases in presales amid challenging macroeconomic conditions. However, BSD's presales were 6% lower than its own targets, as the company postponed three condominium launches to 2016. BSD's diversity across property products and price points is a key driver of its performance, allowing the company to adjust sales plans to match demand.

Strong Recurring Cash Flow: Investment property generated around USD67m in EBITDA during 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 2015 investment property EBITDA was 15% lower than 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 assets accounting for 62% of income.

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.

Strong Balance Sheet, Large Land Bank: BSD has a track record of maintaining a strong balance sheet. At the end of December 2015, its leverage, measured as net debt/adjusted inventory, was just 10.2%. Fitch expects leverage to remain below 25% over the medium term. Its land bank amounted to 39.5 million square meters at the end of 2015. Uniquely, the title to 63% of BSD's land bank is under the company founders' names, an arrangement dating back to BSD's inception. A legally binding agreement confers the rights to developing the land to BSD. To be conservative, Fitch has excluded the portion of land under the founders' names from its leverage calculation. But it should be noted that this agreement has not been breached since its inception.

High Capex, Geographically Concentrated Sales: BSD expects to spend around IDR8trn 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 track record of successfully developing similar properties. BSD anticipates spending a further IDR2trn on land banking annually until 2018. In 2015, nearly 70% of BSD's presales were in within the BSD City township in the Serpong region outside Jakarta, but were diversified across various 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 (2015: IDR904bn)
- BSD to spend over IDR6trn on capex in 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 24 months, given the company's evolving investment property portfolio compared to higher rated international peers and high capex and execution risks related to the investment property expansion. Over the longer-term, the following may result in an upgrade:

-Increased scale and granularity of the investment property portfolio, so it generates over 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 (2015: 2.9x)
-Leverage sustained below 30%

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: At the end of 2015 BSD had IDR6.1trn of readily available cash against IDR7.9trn of gross debt. IDR1.8trn of debt consists of short-term secured working capital facilities, with a further IDR159bn of current maturities and capital leases. Fitch expects BSD to generate a free cash outflow of around IDR800bn in 2016, after factoring in capex and land banking. The company also has a further IDR750bn of approved but unutilised credit facilities outstanding.