Key Takeaways
- We expect Indonesian property developers to restructure the majority of the notes that are due to mature before the end of 2025, if offshore funding conditions remain tough. We anticipate fewer maturing notes to undergo below-par tender than in the 2022-2023 restructuring round.
- Developers with high-quality unpledged assets and healthy financial conditions are more likely to obtain domestic bank loans to partially or fully redeem the maturing notes.
- The potential notes restructuring is unlikely to improve leverage profiles or enhance credit quality materially, though it could address a liquidity crunch in the next 12 months.
A key driver of Indonesian property developers' creditworthiness in 2024 will be their ability to refinance well ahead of maturity. Obstacles remain as a 2025 maturity wall approaches. Offshore funding conditions continue to be selective, and heightened borrowing costs have forced developers to turn to domestic banks to meet refinancing needs. This trend will likely endure, but domestic banks are unlikely to fully satisfy the refinancing needs. For 2025, offshore bond maturities alone stand at about US$710 million, or Indonesian rupiah (IDR) 11 trillion.
Over the past two years, developers have resorted to note restructurings and tender offers. In our view, restructuring the notes could still be one of the ways to address the upcoming maturities. That said, we anticipate a lower proportion of below-par tenders compared with the last round of restructuring in 2022-2023. Our analysis indicates that even with a debt haircut, leverage will remain high for some issuers.
Chart 1
Limited cash balance and free operating cash flow mean refinancing remains the primary approach for most developers to address the upcoming maturities. For issuers with lower credit quality, refinancing risk will increase over the next 12 months because of limited access to funding.
Indonesian property developers could potentially restructure the majority of the notes maturing before the end of 2025, should offshore funding conditions remain tough. Given that the trading price of some notes has rallied over the past six months, we anticipate a lower proportion of maturing notes will see a material below-par tender. This is in contrast to the liability management exercise undertaken in 2022-2023, during which six out of seven notes underwent a below-par tender.
For the notes restructuring over the past two years, we observed that those that underwent a tender were trading materially below par at the time of restructuring. The principal haircut reached as high as 53%. Only the notes issued by Kawasan Industri Jababeka Tbk. PT were exchanged at par.
For the notes whose trading prices remain above 90 at the time of refinancing, it is less likely that investors will accept a material below-par tender offer. We generally view a note restructuring or a below-par tender without adequate offsetting compensation as a distressed transaction, tantamount to a default. This is on the condition the issuer faces a conventional default without such transactions.
Table 1
Majority of note restructurings and tender offers were below par | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Company | Date of launching notes restructuring | Original bonds | Type of restructuring | Principal haircut (%) | Outstanding bonds post restructuring | Latest bond price | ||||||||||
Modernland Realty Tbk. PT |
Mar-22 | US$179 million 5% 2025 | Part of US$ notes tendered at 53 cents-60 cents | 40%-47% | US$133 million due 2025 | 35.0 | ||||||||||
US$268 million 5% 2027 | Part of US$ notes tendered at 47 cents-55 cents | 45%-53% | US$217 million due 2027 | 32.5 | ||||||||||||
Alam Sutera Realty Tbk. PT |
Oct-22 | US$171 million 11% 2024 | Majority of US$ notes tendered at 82 cents | Up to 18% | US$247 million due 2025 | 99.9 | ||||||||||
Kawasan Industri Jababeka Tbk. PT |
Nov-22 | US$300 million 6.5% 2023 | - 70% of old notes exchanged at par to new notes with higher coupon - 30% of old notes repurchased at par | 0% | US$186 million due 2027 | 91.7 | ||||||||||
Lippo Karawaci Tbk. PT |
Jan-23 | US$420 million 8.125% 2025 | Part of US$ notes tendered at 87 cents | 13% | US$237 million due 2025 | 95.4 | ||||||||||
US$425 million 6.75% 2026 | Part of US$ notes tendered at 77 cents | 23% | US$195 million due 2026 | 87.2 | ||||||||||||
Agung Podomoro Land Tbk. PT |
Jul-23 | US$300 million 5.95% 2024 | Part of US$ notes tendered at 60 cents | 40% | US$ 132 million due 2024 | 82.1 | ||||||||||
Sources: S&P Global Ratings. Company financial statement. Company investor presentation. Regulatory filings. |
Domestic Funding To Remain Selective
Indonesian developers will still rely on domestic banks to support their refinancing needs, given all-in funding costs remain high in the offshore market compared with domestic funding costs.
Indonesian banks have a relatively small exposure to real estate. Over the past four years, the proportion of bank loans to the real estate sector has remained stable at 4.5%-5.0%. That said, the real estate sector has benefited slightly from an overall expansion in domestic credit. Over the past four years, domestic bank loans granted to the real estate sector have increased by about 32%, outstripping the overall credit growth of 26%. This trend aligns with our observation of a rising proportion of domestic bank loans in the capital structure of most developers.
Chart 2
Despite ample domestic liquidity, local banks will continue to prioritize loans to larger private and state-owned firms. In addition, loan growth has also been moderating since 2023 due to higher borrowing costs.
Similarly, the domestic bond market has also been selective, and issuance mainly came from financial institutions and state-owned companies. Private credit has been increasing as a new funding source in Asia. Indonesian developers, however, have a limited track record of tapping into this funding channel.
Sufficient Unpledged Assets Doesn't Mean Easily Secured Bank Loans
The quality of collateral assets is crucial for local banks' commercial-lending decisions. Most domestic bank loans for Indonesian developers are on a secured basis.
The addition of high-quality collateral assets could increase the probability of successful restructuring of notes. This is because investors may ask for collateral to reduce the risk by extending the maturity. This is in line with some restructuring cases over the past two years.
In our view, local banks favor income-producing investment properties because they offer more stable cash flows and are relatively easier to liquidate than land. Prime land plots within developers' matured townships would be the next in priority as collateral, given their strategic locations. These two asset classes constitute the majority of developers' pledged assets for existing bank loans.
Even with unpledged assets, developers with weaker credit standing could face a tough task obtaining sizable long-term bank loans because the local banks may have concerns about the sustainability of the business. The loan procurement process can be lengthy. It can take six to 12 months to finalize agreement on the loan structure, collateral assets, and due diligence, especially on land title.
That said, Indonesian developers typically have extensive unpledged land banks. As of Dec. 31, 2023, most developers pledged up to only 5% (by area) of their total land bank. The unpledged prime land bank in their respective matured townships also remains sizable. This helps meet the high collateral coverage that banks require for developers, which is generally above 120%.
The availability of unpledged investment properties does, however, vary among developers. For instance, Modernland Realty Tbk. PT has limited investment properties in its portfolio, whereas Alam Sutera Realty Tbk. PT has pledged most of its investment properties.
Table 2
Developers have extensive unpledged assets | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Company | Land bank size, hectares^ | Land bank valuation*, IDR billion | Pledged land, by land area | Investment properties (IPs) valuation*, IDR billion | Pledged investment properties | |||||||
Agung Podomoro Land Tbk. PT | 500 | 4,600 | About 5% | 6,280 | About half of the IPs have been pledged | |||||||
Alam Sutera Realty Tbk. PT |
2,000 | 14,310 | Less than 5% | 1,600 | The majority of the IPs have been pledged | |||||||
Bumi Serpong Damai Tbk. PT |
More than 4,500 | 22,000 | Less than 5% | 9,200 | Less than 20% of the IPs by valuation have been pledged | |||||||
Ciputra Development Tbk. PT | 2,200 ~ | 16,900 | Limited | 5,200 | The majority of office and retail IPs have been pledged. A majority of hotel portfolio are unpledged. | |||||||
Kawasan Industri Jababeka Tbk. PT |
5,100 | 7,200 | About 5% | 80 | Nil | |||||||
Lippo Karawaci Tbk. PT |
1,400 | 18,300 | Less than 5% | 900 | Some IPs have been pledged | |||||||
Modernland Realty Tbk. PT |
2,100 | 7,600 | Less than 5% | Limited IP | N/A | |||||||
Pakuwon Jati Tbk. PT |
480 | 3,100 | Nil | 12,200 | Nil | |||||||
IDR--Indonesia rupiah. ^As per latest disclosures. ~directly owned land bank excluding joint operation land bank.*Cost-based valuation as of Dec. 31, 2023. N/A--Not applicable. Sources: S&P Global Ratings. Company financial statements. Company investor presentation. |
Capital Structure Unlikely To Strengthen After Potential Restructuring
Restructuring doesn't guarantee a more robust capital structure. As noted, below-par tender is less likely for notes maturing before the end of 2025 if the trading price remains above 90. Therefore, the potential restructuring of notes is unlikely to make the capital structure more sustainable because there will be little reduction in debt. However, it could alleviate a near-term liquidity crunch by extending the maturity date.
Based on the current trading price, even if there is a 10% haircut on maturing notes, it will not meaningfully improve the leverage profile of developers. This is because of a limited amount of debt haircuts and developers' persistent elevated leverage.
The ability of developers to refinance will still depend on issuer credit quality and market confidence over the next two to three years. Developers with weaker credit standing will struggle. This is despite our expectation that aggregate residential marketing sales in Indonesia will grow by about 5% in 2024. We believe their small operating scale and limited free operating cash flow generation are unable to sustain the debt burden.
Existing Policies Unlikely To Change With Incoming President
We don't foresee the recent election of a new president in Indonesia causing any major policy changes toward the real estate sector. The regulatory policies released last year aimed to support the end-user demand for residential property in the country. This includes a phased value-added tax deduction program toward the end of 2024, which should support the sales of affordable residential units.
Previous election cycles have had little effect on local funding sentiment. Any slowdown they have caused in real estate buying activity has been short-lived.
The credit quality of Indonesian property developers will further diverge in 2024, with refinancing risk as a key credit driver. Issuer credit quality and the availability of high-quality collateral assets will be among the pivotal factors as the maturity wall nears.
Editor: Lex Hall
This report does not constitute a rating action.
Primary Credit Analyst: | Fiona Chen, Singapore + 65 6216 1085; fiona.chen@spglobal.com |
Secondary Contact: | Simon Wong, Singapore (65) 6239-6336; simon.wong@spglobal.com |
Research Assistant: | Johann Tan, Singapore |
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