Fitch Ratings has downgraded Indonesia-based developer PT Modernland Realty Tbk's (MDLN) Long-Term Issuer Default Rating (IDR) to 'C' from 'CC'.

Fitch has also downgraded the rating on the USD150 million notes due 2021 and USD240 million notes due 2024 issued by its wholly owned subsidiaries, JGC Ventures Pte. Ltd. and Modernland Overseas Pte Ltd, respectively, and guaranteed by MDLN, to 'C' from 'CC'. The Recovery Rating on the notes remains at 'RR4'.

The downgrade follows confirmation that the company did not pay a coupon due 31 August 2020 on the 2021 notes and has entered into a 30-day grace period.

KEY RATING DRIVERS

Missed Coupon; Grace Period: The company's 30-day grace period after missing the August coupon on the 2021 bond will allow it to satisfy the payment obligation before non-payment constitutes an event of default. Fitch estimates the company does not have sufficient cash to service its debt and would be reliant on external funding to meet the coupon payment. Non-payment after the grace period will constitute an event of default and Fitch may downgrade MDLN's IDR and the rating on the bonds to 'Restricted Default' (RD).

Severe Liquidity Crunch: MDLN's liquidity position remains under severe pressure, which led to the restructuring of a IDR150 billion bond in July 2020. The company said the coronavirus pandemic has caused difficulty in collecting payments from existing buyers of its properties, and payment deferrals or cancellations from pre-sales. The company's efforts to revive sales may also face challenges due to weak buyer sentiment amid the pandemic. The publicly announced debt restructuring may also have impaired buyer confidence over the company's projects.

ESG - Governance: MDLN has ESG Relevance Scores of 5 for Management Strategy and Financial Transparency. This follows our assessment that financial management with respect to refinancing and disclosure of pertinent information has deteriorated. This is evident from the challenges the company is facing in meeting its debt obligations, and the company is unable to provide timely information on its liquidity position, cash balance and concrete refinancing plan. In addition, management has not been able to implement a strategy to secure funding or improve cashflows and therefore pay the USD dollar bond coupon.

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DERIVATION SUMMARY

MDLN's downgrade to 'C' reflects the non-payment of the US dollar 2021 note coupon due 31 August 2020 and its 30-day cure period.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Limited access to new funding

No pre-sales in both industrial and residential segments in 2Q20, with pre-sales to gradually resume in 3Q20 and 4Q20

Zero collections in 2Q20 and 3Q20 from industrial properties sold in the past

Around 25% of MDLN's residential pre-sales are paid in cash or instalments to the developer. We have assumed zero collections on these in 2Q20 and 3Q20

Collections from new residential pre-sales to resume in 3Q20

No significant reduction in operating expenditure except for marketing expenses, in line with lower pre-sales

Key Recovery Rating Assumptions

The recovery analysis assumes MDLN would be liquidated in a bankruptcy rather than be considered a going-concern. Fitch has also assumed a 10% administrative claim in the recovery analysis.

The estimate reflects Fitch's assessment of a 50% advance rate on the value of trade receivables under a liquidation scenario, inventory, fixed assets, investments in associates and land bank for long-term development. We adjusted the advance rate assumptions for trade receivables, investments in associates and land bank for long-term developments to 50% from a previous 75%, 100% and 100%, respectively. The adjustments reflect our view that the company's financial distress may have influenced buyers' confidence over the company's projects, impairing the recovery prospects of these assets.

We have also deducted from trade receivables the amount due from PT Waskita Modern Realty (Waskita) and from investments in associates, PT Lotte Land Modern Realty and Waskita. This is because we believe the company may not be able to recover these assets in light of the challenges it is facing in collecting the amount due from Waskita in the past year, while the joint-venture projects are still at an early development stage.

These estimates result in a recovery rate corresponding to an 'RR2' Recovery Rating for MDLN's senior unsecured notes. Nevertheless, Fitch rates the senior notes 'C' and maintained the Recovery Rating of 'RR4' because under the agency's Country-Specific Treatment of Recovery Ratings Criteria, Indonesia falls into Group D of creditor friendliness. Instrument ratings of issuers with assets in this group are subject to a soft cap at the issuer's IDR and a Recovery Rating at 'RR4'.

RATING SENSITIVITIES

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

If MDLN pays the missed coupon within the cure period

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

The IDR will be downgraded to 'RD' if the payment default is uncured.

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

Insufficient Liquidity: MDLN missed the USD8 million coupon due 31 August 2020 on its 2021 bond and Fitch believes the company will not have sufficient cash to meet its interest payments in the next few months, including another USD8 million due 13 October 2020 on the 2024 bond.

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

MDLN has ESG Relevance Scores of 5 for Management Strategy and Financial Transparency based on our assessment that the management of refinancing risks and the disclosure of pertinent information has deteriorated.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - 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.

RATING ACTIONS

ENTITY/DEBT	RATING	RECOVERY	PRIOR
PT Modernland Realty Tbk	LT IDR	C 	Downgrade		CC

senior unsecured

LT	C 	Downgrade	RR4	CC

Modernland Overseas Pte Ltd

senior unsecured

LT	C 	Downgrade	RR4	CC

JGC Ventures Pte. Ltd.

senior unsecured

LT	C 	Downgrade	RR4	CC

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2020 Electronic News Publishing, source ENP Newswire