Fitch Ratings has downgraded Indonesia-based homebuilder PT Kawasan Industri Jababeka Tbk's (KIJA) Long-Term Issuer Default Rating (IDR) to 'CC', from 'B-'.

At the same time, Fitch has downgraded the company's senior unsecured USD300 million notes due 5 October 2023 to 'CC', from 'B-', with a Recovery Rating of 'RR4'. The notes are issued by its wholly owned subsidiary, Jababeka International B.V. and are guaranteed by KIJA.

Fitch Ratings Indonesia has simultaneously downgraded KIJA's National Long-Term Rating to 'CC(idn)', from 'BB+(idn)'.

The downgrade reflects increasing uncertainty over whether KIJA will be able to obtain financing to address its USD300 million notes due October 2023 amid market reports that the company may pursue a bond exchange. Cash and available committed bank lines are insufficient to repay debt maturing in the next 12 months.

'CC' National Ratings denote the level of default risk is among the highest relative to other issuers or obligations in the same country or monetary union.

Key Rating Drivers

Distressed Capital Transaction Likely: We believe there is heightening uncertainty as to whether KIJA will be able to refinance its notes amid weak investor sentiment, with capital market dislocation stemming from broader economic conditions. Market reports suggest that the company may need to pursue a bond exchange if alternative financing is unavailable or at acceptable terms. We may regard a bond exchange that results in a material reduction in original terms as a distressed debt exchange, as it could be seen as being done to avoid a default amid weak market access.

Bank Access Supportive, But Insufficient: KIJA obtained a USD100 million secured loan from a domestic bank in October 2022; however, the loan, combined with IDR1.2 trillion (USD81 million) in cash on hand as of end-June 2022, is insufficient to cover more than IDR4.5 trillion (USD303 million) of debt maturing in the next 12 months. Most of this debt consists of KIJA's USD300 million unsecured notes due 5 October 2023. 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.

Derivation Summary

KIJA's ratings reflect our view of the company's increased refinancing and liquidity risk, given market reports that it will undertake a bond exchange on its USD300 million unsecured notes.

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

Considering Kendal's ongoing development plans, we do not assume any dividends in 2022 and 2023

RATING SENSITIVITIES

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

Significant and sustained improvement in liquidity

Successful refinancing of outstanding debt without a material reduction in original terms

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

A further weakening in liquidity

An announcement of a bond exchange that Fitch considers to be a distressed debt exchange

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

See Key Rating Drivers above.

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-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

KIJA 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. This has a negative impact on the credit profile, and is relevant to the ratings 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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