Rupiah’s Impairment, and Its Influence towards Property Companies

Judging by its business nature, Rupiah’s exchange rate fluctuation on foreign currency, in this case, US Dollar, has no actual effect towards the performance of property companies/issuers. It is because they earn their income in Rupiah and pay expenses such as contractor fees, and land acquisition in Rupiah as well (there are also some property companies/issuers that import the building materials, but its value is typically small). However, it will be different when the company has dollar-denominated debt, where the value of the accrued interest as well as the principal amount of the debt itself become highly influenced by the fluctuation of Rupiah exchange rate against Dollar.

Currently, there are at least five property companies in IDX that have Dollar-denominated debt. They are Alam Sutera Realty (ASRI), Lippo Karawaci (LPKR), Kawasan Industri Jababeka (KIJA), Modernland Realty (MDLN), and Bakrieland Development (ELTY). Except for ELTY that owes debt ubiquitous, the other four issue dollar-denominated debt in form of long-term bonds issued in Singapore. Here are the details:

Companies	Bond Units	Debt Value	Interest	Mature
		(Million US Dollar)	(%)
LPKR	5	653	6.12 - 9.00	2019 - 2020
ASRI	2	385	6.95 - 10.75	2017 - 2020
KIJA	1	175	11.75	2017
MDLN	1	150	11.00	2016

Note:

1. Except for MDLN (no. 3), the total value of debt is as at 30 September 2013. Once converted into Rupiah and presented in the financial statements respectively, the numbers become quite large because of the exchange rate on rupiah on that date was on one of its lowest level, which is Rp11, 613 per US Dollar.
2. KIJA plans to issue new bonds to pay off the old one, valued at US$ 350 million. The bonds will due in 2020 with lower interest rate (about 6-7%), yet there is no certainty when the bonds will be issued.
3. MDLN issued its bonds on October 25 2013, so that the above bonds have not been included in its latest financial statement. MDLN had intended to issue bonds worth US$ 300 million, yet only half of it could be realized. When the bonds issued, Rupiah exchange rate was at its fairly low level, which is at Rp11,142, so that by the time Rupiah strengthened to pass that level, then MDLN will achieve rate benefit. Currently, Rupiah is still at the level of Rp11,486 per Dollar.

Except for MDLN, three other property companies issued bonds when Rupiah remained at Rp9,000 (in average) per dollar. So that when the value of current Rupiah fell to Rp11,000 (in average), then LPKR, ASRI, and KIJA are likely to experience decline in profit due to foreign exchange losses; either the one that has already realized (interest on bonds that have been paid), or not (the unpaid interest, and also the value of the unpaid principal debt). In the most recent financial statements of KIJA, which is for the period of the third quarter of 2013, the two types of losses (which are the realized one or not) are equally presented as expenses that reduce the value of company profits, and consequently, KIJA’a profit seems to decline sharply from Rp281 billion to Rp97 billion only.

However, I may need to underline the word 'seem' here, because basically, KIJA’s profit is not actually decline considering its unpaid USD 175 million-bonds debt will be paid later in 2017. So that the losses here are due to the decline in the value of bonds (worth about Rp300 billion) that have not been realized, or in other words, the company does not actually spend that Rp300 billion. It can also be seen from KIJA’s tax expense recorded of Rp65 billion in the third quarter 2013. The amount is still higher than the tax for the same period in 2012 amounted to Rp58 billion. If KIJA’s profit really declines, then the tax value should also be down.

While on the LKPR’s financial statements, only the realized foreign exchange losses are included in the financial statements, so that the net profit could still be written up significantly. After I learned, it is because LKPR management has protect the value of its bonds using non-deliverable USD call spread option facility with several foreign banks, so that the company considers that the potential foreign exchange losses is due to impairment of Rupiah, when later, the principal bonds are paid in 2019 and 2020, could be omitted. Consequently, on LKPR’s financial statements, the unrealized foreign exchange loss is replaced by the burden to pay for the spread option facility usage, which has much smaller value.

Whereas KIJA do not have/use such hedging facility, so that the unrealized losses are still presented in the financial statements. Nevertheless, the company has one particular reason why they do that (do not use hedging facilities for bonds), we will discuss below.

One other company, ASRI, up to this article was written, has not release its latest financial statement yet. But the good news for you who hold the shares, since from the beginning, ASRI has been protecting the value of its bonds (also use call spread option facility); so most likely the company’s profit in the third quarter will still going up, because the unrealized losses will not going to be included in the financial statements.

Okay, so, what does it mean by non-deliverable USD call spread option?

If you are looking for the term’s definition in Google, then you will not find a simple explanation. But let me explain with an example of option that had been done by ASRI for one of its bonds due in 2017, valued at US$ 150 million. In June 2012, ASRI used call spread option facility provided by several banks in Singapore, where the company has option/right to buy Dollars from the bank at a price range between Rp9, 400 to 11,000 per Dollar, with maximum purchase value of US$ 100 million aka from Rp9.4 to 11 trillion. This facility option will expire in 2017 (the same time with the bond’s due), and the company will be charged for transaction fee of 1.3% per year of the total value from the performed transaction.

Then on June 30, 2013, aka the expiration date of the financial statements of Second Quarter of 2013 (because ASRI has not release its financial statement for the third quarter), Rupiah was weakened and was in a position of Rp9, 929 per Dollar. Since ASRI couldn’t use his right to buy Rupiah at its lowest price of Rp9, 400, then there is a difference of Rp529 (9.929 minus 9.400), which after multiplied by USD 100 million, the amount becomes Rp52.9 billion, or we round it off to Rp53 billion. That funds amounting to Rp53 billion is then considered as a financial asset, which could be withdrawn at any time if needed.

Because there are additional assets from the emergence of earlier financial asset, then in the company’s balance sheet, the assets position is increased by Rp53 billion, while the position of obligations/liabilities also increased because of the value of ASRI’s bond debt in Rupiah was increased due to the impairment (becomes breakeven). If Rupiah fixed in position of Rp9, 929 per Dollar up to expiration of the option contract on March 27 2017, in which the bond is also due on that date, then ASRI could pay off its bonds although the value increases. It is because the company has already set up a fund in form of financial assets that worth Rp53 billion earlier.

However, I still find myself confuse in this case. First, the value of option held by ASRI is just USD 100 million, whereas the bond’s value is USD 150 million. If it is like that, is there any surplus value of bonds that have not been protected? Moreover, it was mentioned that the spread was range from Rp9,400 to 11,000 per Dollar. But since today Rupiah is at the level of 11,400 (in average), how ‘bout that? Can you help us explain?

Whatever it is, because of this hedging facility, then the projection of losses (or gains) that may be experienced by ASRI due to Rupiah’s impairment (strengthening) associated to its bonds debt value, is not included in the income statement. Yet ASRI still include that hedging facility expenses amounted to RP13 billion, as part of the income/other expenses. It means that ASRI still needs to spend extra money to protect its bonds’ value, although it is smaller than the hedging function that has been gained (Rp13 billion vs. Rp53 billion).

How ‘bout KIJA? Because the company does not use hedging facility at all, then the projection in which the company has to spend extra fund amounted to Rp300 billion (in average) to pay off the bonds by 2017 (if Rupiah rate position is equal with the rate at September 30 2013), will be directly recorded on its financial statement as foreign exchange loss. On the other hand, if later Rupiah exchange rate rise and exceed its rate when the bonds issued, which is Rp9,493, then the Rp300 billion-foreign exchange loss earlier will turn into profit rate. But once again, that profit is only in form of bookkeeping; aka there is no money.

Then why KIJA does not hedging its bonds? It is because the bonds are used to fund the power plant project in Jababeka (or, precisely, to refinance/pay off the bank debt used to build the power plant), where the project obtains its revenue in US Dollar. KIJA trough its subsidiary, PT Bekasi Power, on last January 2013, has already signed power sales contract with PT PLN for the next 20 years, with total sales of USD 105 million per year, and EBITDA of USD 24 million (EBITDA is approximately equal as net profit pretax). If prior to this, KIJA’ power plant still has loss, then in current third quarter, KIJA has started to gain its net profit, although still in small amount, which is Rp33 billion (in average). But this is progressing.

Powerplant of PT Bekasi Power, a subsidiary of KIJA

Because of that, although the company does not use hedging facility, KIJA’s bonds have been protected since the company has already gain its revenue in USD currency. In addition, the company does not have to spend extra fund for hedging at all. In reality, on the third quarter of 2013, KIJA’s performance still growing up with revenue nearly doubled, as well as its net profit, if only there is no exchange rate loss as we’ve discussed above.

Only if later the company issuing new bonds worth of USD 350 million, where one of them is used to pay off the previous bonds, then obviously KIJA will also use hedging facility just like ASRI and LPKR. As for another property company, MDLN, the rep has already explained in its bond prospectus that they will also use hedging facility to protect the bonds’ value from Rupiah’s impairment risk.

Anyway, it is clear that KIJA, in its financial statement, shows that its profit fell due to the exchange rate losses, and it causes the shares to fall down. In short-term, the shares practically can only rise if the company announced that they will follow the other three companies to protect the bonds’ value, or if Rupiah bounce back to at least Rp10,000.

But in the long run, especially if we look from the valuation side, then among those four property companies, KIJA is the most undervalued, even when its shares price was at 300. If you want to enter, then you can wait until the condition gets better (read: Rupiah strengthen), whilst if you already have one, then it’s better to hold.

Original article was written on November 12, 2013