Fitch Ratings has upgraded Indonesia-based developer PT Pakuwon Jati Tbk's (PWON) Long-Term Issuer Default Rating to 'BB' from 'BB-'. The Outlook is Stable. At the same time, the agency has upgraded PWON's senior unsecured rating and the rating on its USD250 million notes due 2024 issued by its wholly owned subsidiary, Pakuwon Prima Pte Ltd, to 'BB' from 'BB-'.
The upgrade follows PWON achieving sustained positive cash flow from operations, recurring EBITDA growth to above USD120 million, and sustained recurring EBITDA/net interest expense above 3.0x, the level at which Fitch had set for positive rating action. Fitch believes PWON's risk profile is more closely aligned towards an investment-property company than a developer. We think PWON's development business is not a drag on its overall risk profile as the company has a recent track record of prudent project execution such as a positive operating cash flow position and low leverage. PWON could undertake further investments after 2019 but we believe the company would continue to adopt a conservative approach thus ensuring it maintains a financial profile consistent with its assigned rating.
Attractive Investment-Property Portfolio: Pakuwon's investment portfolio contains some of Jakarta's most attractive assets, which would be difficult to replicate. These assets are in prime locations in Jakarta and Surabaya and have had consistently high occupancy, which provides strong and predictable cash flows. PWON also has a satisfactory track record in managing these assets. Its three biggest superblocks, which contribute more than 70% of recurring revenue, target upper-middle class consumers given their prime locations and tenant mix. Fitch believes this segment is more resilient in a challenging economic environment as occupancy rates have been stable and high in the past 24 months.
Fitch expects PWON's recurring EBITDA to rise to USD125 million by end-2018 (2017: USD109 million), led by additional net leasable area with confirmed tenants for Tunjungan Plaza and Pakuwon Mall, and organic growth from other assets. The recurring EBITDA growth and conservative development strategy contribute to a financial profile commensurate with a 'BB' rating, characterised by recurring EBITDA/net interest of above 3.0x (2018F: 7.0x) and low leverage. (end)
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