Fitch Ratings has downgraded
We believe this represents a restricted default under our distressed debt exchange (DDE) definition.
Subsequently Fitch has upgraded APLN's Long-Term IDR to 'CCC-' to reflect the company's liquidity prospects following the tender offer. Its cash balance is insufficient to pay the remaining
Fitch has also upgraded APLN's unsecured US dollar notes due in
Key Rating Drivers
DDE Drives Downgrade: We regard APLN's tender offer as a DDE, as we believe the amendments to the terms constitute a material reduction in original terms and that the transaction helped the company to avoid a traditional default, given its untenable liquidity profile. As such, the Long-Term IDR was downgraded to 'RD' on the completion of the DDE, in line with our criteria.
Weak Liquidity, Deteriorating Cash-Balance: The subsequent upgrade to 'CCC-' reflects that the company is no longer in a default-like process, and its weak liquidity prospects. Headroom is minimal, with high execution risks around its ability to repay debt in the next 12 months amid falling presales. We forecast the company's consolidated cash balance will deteriorate to below
High Refinancing Risk: The completion of the tender offer has reduced, but not eliminated, APLN's refinancing risk in the next 12-18 months. APLN has two unpledged properties valued at around
Declining Presales Pressures Liquidity: Fitch forecasts consolidated presales, excluding bulk land sales, to fall by more than 20% to
Presales in 2H23 may stabilise subject to further new project launches, as housing demand will be supported by signs of benign inflation and moderating interest rates domestically, although persistent cancellations in APLN's larger projects are a risk and may affect the company's refinancing efforts.
Weakening Interest Coverage: APLN's holding company (holdco) liquidity will remain under pressure despite the completion of the tender offer that reduced more than half of the face value of the
Parental Linkage Considerations: APLN's Standalone Credit Profile (SCP) is aligned with Fitch's internal assessment of the majority parent,
Derivation Summary
APLN's ratings reflect its untenable liquidity profile, which is exacerbated by a trend of weakening presales. Fitch believes that much of the company's refinancing options are subject to material execution risk.
APLN's rating is two notches below that of its closest peer,
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Consolidated presales of
EBITDA margin of about 28%-29% in 2023 and 2024;
Cash outflow for construction of
Capex on fixed assets and investment properties of
Consolidated negative free cash flow of about
RECOVERY RATING ASSUMPTIONS
We assume APLN will be liquidated in a bankruptcy rather than continue as a going concern, because it is an asset-trading company. In estimating APLN's liquidation and distribution value, we have made the following adjustments and assumptions.
We use a 75% advance rate against the value of trade receivables.
We use a 60% advance rate against the value of inventory, net of advances. This reflects our assumption of a 100% advance rate against the value of completed buildings and land, and a 50% advance rate against buildings under construction.
We use a 100% advance rate against investment properties as well as property, plant and equipment, mainly related to shopping mall and hotel assets. We believe a 100% advance rate is reasonable as these assets are recognised at historical cost, including depreciation, while the market value is considerably higher.
We deducted the carrying value of the Pluit City and Green
We deducted 10% of the resulting liquidation value for administrative claims.
These assumptions result in a recovery rate corresponding to a 'RR1' Recovery Rating for APLN's unsecured notes. However, Fitch acknowledges that there is material uncertainty regarding the ability to realise the sale of these assets. We rate the senior unsecured notes at 'C' with a Recovery Rating of 'RR4' because, under Fitch's Country-Specific Treatment of Recovery Ratings Criteria,
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A sustained improvement in liquidity, including the successful refinancing of the US dollar notes due in
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Further weakening in liquidity that suggests a default of some kind appears probable, or that a default-like process has begun, including if the issuer announces a debt restructuring that Fitch views as 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 '
Liquidity and Debt Structure
Insufficient Liquidity: APLN's unsecured
The company expects to use several unpledged assets to the tune of
Issuer Profile
APLN is an Indonesian property developer with exposure to residential and commercial properties. It has presales from key projects in
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
APLN has ESG Relevance Scores of '4' for Management Strategy and Governance Structure due to the company's high development risk profile, a key part of its strategy. This hampers financial flexibility and leads to an impending risk of default, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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.
Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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