Fitch Ratings has downgraded Indonesia-based homebuilder PT Kawasan Industri Jababeka Tbk's (KIJA) Issuer Default Rating (IDR) to 'C', from 'CC', following the company's 8 November announcement offering to exchange most of its senior unsecured notes due October 2023 for new senior secured notes due 2027.

At the same time, Fitch has downgraded the senior unsecured USD300 million notes due 5 October 2023 to 'C' from 'CC', with a Recovery Rating of 'RR4'.

The bonds are issued by wholly owned subsidiary, Jababeka International B.V., and guaranteed by KIJA. Fitch Ratings Indonesia has also downgraded KIJA's National Long-Term Rating to 'C(idn)' from 'CC(idn)'.

The downgrade reflects Fitch's view that the proposed exchange constitutes a distressed debt exchange (DDE), because it results in a material reduction in terms to investors, and we believe the transaction is conducted to avoid a default on the October 2023 notes. Short of completing the exchange offer, KIJA would be left with extremely limited options to repay the notes, due to weak investor sentiment for emerging-market high-yield debt.

If the DDE is completed, Fitch will downgrade KIJA's IDR to 'Restricted Default' (RD), and re-assess the ratings in line with the post-exchange capital structure. If the exchange is unsuccessful, KIJA's ratings will be reassessed to reflect the heightened near-term liquidity risks.

'C' National Ratings denote a default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity is irrevocably impaired.

Key Rating Drivers

Exchange Offer Constitutes a DDE: The transaction contemplates exchanging the face value of at least 90% of KIJA's outstanding bonds due October 2023 into 30% of cash and 70% of longer-dated unsecured notes maturing in 2027, with a coupon step-up ranging from 7%-9% in annual increments of 50bp, compared with a fixed cash-coupon for the current notes. We believe these amendments, which have been combined with a consent solicitation to remove restrictive covenants on any remaining notes, constitute a material reduction in terms.

Exchange to Avoid Default: We believe KIJA's ability to raise new financing has weakened significantly amid souring investor sentiment for emerging-market debt, as global growth prospects slow due to persistently high inflation and rising interest rates.

The refinancing plans had previously included raising USD100 million from domestic banks, and the balance via a fresh issue in cross-border bond markets. KIJA has secured a USD100 million bank loan from PT Bank Mandiri (Persero) Tbk (BBB-/AA+(idn)/Stable), which it proposes to use to prepay an equivalent value of the old note issuance. However, the prospects of raising the balance via bond issuance have diminished - given weak market access - with secondary market trading implying unserviceable interest payments on any new issuance.

Presales to Moderate: We forecast presales, excluding KIJA's joint venture - PT Kawasan Industri Kendal - to fall by 5% in 2023 to around IDR1 trillion, on softer economic growth amid rising inflation and interest rates. Presales should improve to IDR1.1 trillion in 2022, from IDR994 billion in 2021, on the reopening of international borders following the Covid-19 pandemic. This is facilitating a normalisation of foreign visitors and building momentum for foreign direct investment.

We expect industrial land sales to account for the majority of presales in the next two years, with affordable homes and commercial land plots making up the balance.

ESG - Governance: The company has not fully addressed market concerns on debt maturities amid limited access to capital, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors

Derivation Summary

KIJA's Long-Term IDR of 'C', the 'C' rating on its unsecured notes and the National Long-term Rating of 'C(idn)' reflect the company's announced exchange offer on its outstanding unsecured notes, which Fitch believes constitutes a DDE.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Presales, excluding the Kendal joint venture, to fall to around IDR1.0 trillion in 2023 (2022 forecast: IDR1.1 trillion)

Non-development EBITDA of around IDR400 billion in 2022 and IDR380 billion in 2023

Land banking and capex, excluding Kendal, of around IDR295 billion in 2022 and IDR200 billion in 2023

We do not assume any dividends in 2022 and 2023, considering Kendal's ongoing development plans.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch will reassess KIJA's capital structure and cash flow after the completion of the exchange offer, or if the exchange is not completed, to determine its IDR, senior unsecured ratings and National Long-Term Rating.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch will downgrade KIJA's Long-Term IDR to 'RD' (Restricted Default) and National Long-Term Rating to 'RD(idn)' if the exchange offer is completed, and thereafter re-assess the company's IDR based on its post-exchange capital structure.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Bank Funding Insufficient: KIJA had around IDR1.2 trillion (USD81 million) of cash as of 30 July 2022, compared with around IDR4.5 trillion (USD303 million) debt due in the next 12 months, comprising mostly of its USD300 million unsecured notes due 5 October 2023. KIJA has insufficient liquidity to repay the notes, with only USD100 million committed from a domestic bank in October 2022 and its neutral free cash flow. The company's access to capital markets has weakened significantly in the current environment, such that we believe the proposed exchange offer is key to repaying its cross-border debt.

Issuer Profile

KIJA is an Indonesia-based industrial township developer. The company generates presales from its two flagship projects, Kota Jababeka in Cikarang, West Java, and Kawasan Industri Kendal, in Central Java. It had over 1,700 hectares of landbank across its two estates at end-December 2021, which was sufficient for more than 20 years of development.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

PT Kawasan Industri Jababeka Tbk has an ESG Relevance Score of '4' for Management Strategy as it has not fully addressed market concerns on debt maturities amid limited access to capital , which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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