OREANDA-NEWS. Fitch Ratings has upgraded PT Pakuwon Jati Tbk's (Pakuwon) Long-Term Foreign Currency Issuer Default Rating (IDR) and foreign currency senior unsecured rating to 'BB-' from 'B+'. The Outlook on the IDR is Stable.

At the same time, the agency has also upgraded the rating on the USD200m senior unsecured notes due in 2019 to 'BB-' from 'B+'. The notes are issued by Pakuwon Prima Pte Ltd and guaranteed by Pakuwon and some of its subsidiaries.

The upgrade reflects Pakuwon's solid and growing recurring cashflows from its investment property portfolio of seven retails malls, three office buildings, one serviced apartment, and one hotel across Jakarta and Surabaya. Its retail malls' net leaseable area (NLA) of 512,000 sqm places Pakuwon among the leading commercial landlords in Indonesia. The quality of its portfolio in terms of location and tenant quality ensures that the company enjoys high occupancy rates and rental reversions.

KEY RATING DRIVERS
Strong Investment Property Portfolio: Pakuwon is a leading Indonesian commercial landlord in terms of NLA. Its malls have occupancy rates of more than 91% (above the industry average), and long-term leases that expire in 5.2 years on average.

Fitch expects Pakuwon's investment property to generate around IDR1.2trn (USD90m) of recurring EBITDA in 2015 compared with IDR980bn in 2014, due to full-year recognition of recurring income from the recently acquired PT Pakuwon Permai. As Pakuwon adds more investment properties to its portfolio, recurring EBITDA/interest coverage ratio will remain solid at above 2.5x and continue to comfortably cover Pakuwon's loan amortisation and dividend payment in 2015-2017.

Volatility in Development Cashflows Mitigated: Pakuwon continues to have significant exposure to development properties, even though its investment portfolio has grown via acquisitions and organically. The cashflows from its development projects are inherently cyclical and more volatile, but Pakuwon's strong investment property portfolio moderates this exposure.

Pakuwon benefits from its market leadership in Surabaya and its ability to create value from its large integrated mixed-use developments despite being a smaller developer. These advantages have helped the company maintain an EBITDA margin of more than 50% across its development properties.

Manageable US Dollar Exposure: Pakuwon had USD200m senior unsecured notes and USD58m mandatory convertible notes payable in its balance sheet at end-2014 - representing 67% of the company's total debt. However, Pakuwon's solid recurring EBITDA will insulate the company from the depreciation of the Indonesian rupiah against the US dollar. Fitch estimates that even if the rupiah depreciates further to 15,000 to the dollar, Pakuwon's recurring EBITDA/interest will remain above 2.0x. In addition, the company has hedged the full principal of its US dollar bond against depreciation of the rupiah using a call spread agreement. The call spread for the first USD100m is for IDR13,000-14,500 and the second USD100m for IDR13,000-15,500.

Conservative Financial Policy, Leverage: Pakuwon has a conservative financial policy and track record of low leverage. Pakuwon has a target debt/EBITDA of less than 2.5x and the company has moved below its target leverage since 2012. Fitch believes that Pakuwon's leverage in 2015-2017 will remain appropriate for its 'BB-' rating with net debt/net inventory lower than 30%.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- 5%-10% increase in average rental rates a year in each of the company's malls
- Projects to progress in line with management expectations
- Dividend pay-out ratio of 30% from net income
- Annual land acquisition expenditure of at least IDR500bn

RATING SENSITIVITIES
Positive: We do not foresee positive rating action in the next two years. However, an upgrade might be considered if the investment property assets increase to above USD1bn (2014: USD 668m) and its top three investment property assets generate less than 60% (2014: around 90%) of recurring revenue.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained deterioration in the ratio of recurring EBITDA from investment properties to interest to below 2.0x
- Net debt/net inventory (net inventory defined as Investment Properties + Inventory + Property and Equipment - Advances) rising above 35% on a sustained basis (2014: 18%)
- Weakening of business profile that would be reflected in a significant rise in vacancy rates or a sustained fall in rentals
- Share of cash flows generated from investment property falls to less than 40%