Moody's may downgrade Matahari's B1 rating

Moody's Investors Service has placed PT Matahari Putra Prima Tbk's (Matahari) B1 corporate family and senior unsecured bond ratings on review for possible downgrade.

The rating action is in response to the Matahari's recent announcement of its proposed sale of its subsidiary Matahari Department Store (MDS) valuing at approximately US$770 million. The sale is subject to regulatory approvals.

"While the proceeds to be received will greatly improve Matahari's near-term liquidity with the result of a net cash position. Moody's is concerned that the sale of MDS will negatively impact the company's operating and business risk profiles," says Ken Chan, a Moody's Vice President.

"The sale will result in a loss of MDS's EBITDA contribution to Matahari, which represents approximately 60-70% of the company's EBITDA annually," says Chan, adding that, "MDS is the largest department store operator in terms of market share in Indonesia and is highly profitable with EBITDAmargins of 10-12%."There also remains a high level of uncertainty over the ultimate usage of the sale proceeds.

Moody's notes that the bond indentures are loose on the type ofreplacement assets that the company can re-invest into, a situation which could result in a material change in its business risk profile.

Matahari may choose to pay down a major portion of its debt. Moody's also notes that the company will need to redeem the outstanding bond amount in full if the cash portion is below 75% of the total sales proceeds under the bond indentures.

Despite the potential for lower leverage, Matahari's overall credit profile may not support the original B1 rating, if it organically grows its food business, which has lower profit margins. The overall operating scale of the company will also be much smaller.

In its review, Moody's will evaluate Matahari's intended use of the proceeds and its expansion strategy, and their resultant impact on the company's overall credit profile upon the successful completion of this transaction.The last rating action for Matahari was taken on 13 July 2009, when Moody's assigned a B1 senior unsecured rating and affirmed its B1 corporate family rating.