OREANDA-NEWS. Fitch Ratings has downgraded Indonesian holding company PT Multipolar Tbk's (Multipolar) Long-Term Issuer Default Rating to 'B' from 'B+'. The Outlook is Stable. The agency has also downgraded Multipolar's senior unsecured rating and USD230m notes due in 2018 to 'B' from 'B+' with 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 downgraded the National Long-Term Rating to 'BBB+(idn)' from 'A(idn)'. The Outlook is Stable.

The downgrade reflects Multipolar's weaker overall business profile, which stems from the change in Fitch's assessment of the credit profile of Indonesian retailer PT Matahari Putra Prima Tbk (MPPA, not rated), in which Multipolar owns a 50.23% stake. Sustained pressure on MPPA's credit profile will result in lower and less reliable dividends paid to Multipolar, the holding company, to cover its operational expenses and interest servicing. Fitch forecasts Multipolar's fixed-charge coverage ratio to remain below 1.25x, which is not consistent with a 'B+/A(idn)' rating. -

'BBB' National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Weaker MPPA Performance: The downgrade reflects Fitch's expectation of lower and less reliable dividends from MPPA on account of MPPA's weaker credit profile. MPPA has experienced a challenging operating environment, with slower economic growth, weaker consumer sentiment and higher competition from smaller retail formats, which has weakened its cash generation. This has seen MPPA's leverage as measured by total adjusted debt/operating EBITDAR increase to 3.2x in FY15 from 1.8x in the previous year. Free cash flow will likely remain negative given MPPA's dividend target and capex plan as well as the challenging environment, which Fitch expects to persist for at least 24 months.

Structural Subordination: The rating of Multipolar reflects the structural subordination that arises from its group structure. Multipolar is a holding company that owns majority stakes in companies involved in businesses, such as retail, IT service and pay-TV. Most of the company's cash flows are generated from its stakes in Indonesian retailers MPPA and PT Matahari Department Store Tbk (MDS), in which Multipolar owns 20.48%.

Lower Sustainable Dividends: MPPA's weaker performance and the absence of a special dividend that was paid in 2015 will reduce Multipolar's dividend receipts to around IDR70bn a year in 2016 and 2017 (2015: IDR218bn). However, we estimate higher dividends of IDR200bn-250bn a year in 2016-2017 (2015: IDR175bn) from MDS - which is debt-free, has a solid financial performance and faces less competition - will help to make up for the reduced dividends from MPPA.

Decreasing Fixed-Charge Coverage: Lower dividend receipts and weak performance by subsidiaries (especially PT Indonesia Media Televisi and Multipolar's China retail operations) will result in decreasing fixed-charge coverage. Fitch expects fixed-charge coverage, as measured by the ratio of (adjusted EBITDA + dividend + rent) to (adjusted interest + rent), to decline to around 1.0x in 2017 and 2018, below our previous 1.25x threshold for negative rating action.

Weaker Liqudity at Holding Company: The lower dividend from MPPA will have to be compensated by dividends from smaller and less established subsidiaries, such as PT Matahari Pacific and PT Nadya Putra Investama. Fitch estimates the ratio of dividends from subsidiaries to interest will decline to around 1.0x in 2016 and 2017 (2015: 1.1x).

The holding company will also need to rely on other measures, such as capital reduction and subsidiaries' repayment of shareholders loans, to cover its operational expenses, if dividend receipts fall short of Mutlipolar's expectations. Liquidity at the holding company is supported by the existing IDR120bn undrawn working capital facility.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Multipolar include:

- Deconsolidation of MPPA figures from Multipolar's consolidated financials; proportionate consolidation of IMTV's EBITDA in accordance with Multipolar's ownership of 65%

- Dividend from MPPA of around IDR70bn and dividend from MDS of around IDR200bn-300bn each year in 2016 and 2017

- MPPA-adjusted capex at around IDR300bn-500bn a year in 2016-2017

- Multipolar Technology to generate around IDR230bn-260bn of EBITDA a year in 2016 and 2017

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Overall improvement in business profile that results in sustainable fixed-charge coverage of above 1.3x, which may be from the divestment of weak subsidiaries or higher sustainable dividends from established subsidiaries or investments.

- Turnaround in MPPA's credit profile as indicated by free cash flow turning neutral or positive.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Fixed-charge coverage falls below 1.0x on a sustained basis.

- Material weakening in liquidity that results from lower dividend receipts or deterioration in subsidiaries' performance or significant reduction in the cash balance of Multipolar (excluding MPPA) or if Multipolar receives increasingly unfavourable terms on its financing