JAKARTA (TheInsiderStories) – On Oct. 15, Indonesia’s (Baa2 stable) Corruption Eradication Commission arrested Lippo Group executives for alleged bribery relating to the issuance of property permits for the Meikarta project, a township development by Mahkota Sentosa Utama (P.T.) (MSU), a 49.99%-owned subsidiary of Lippo Cikarang Tbk (P.T.), which in turn is 54%-owned by Lippo Karawaci Tbk (P.T.) (B3 negative).
“We expect the alleged bribery to have a limited financial impact on Lippo Karawaci at the holding company level and that the B3 ratings and negative outlook remain unaffected at this stage,” said Jacintha Poh, VP – Senior Analyst, Corporate Finance Group, Moody’s Investors Service in a written statement released on Thursday (18/10).
Lippo Karawaci’s ratings do not incorporate any cash-flow expectations from the Meikarta project or from Lippo Cikarang.
That said, the bribery allegation is credit negative for Lippo Karawaci because it highlights the company’s corporate governance challenges and potential reputational damage that will hurt both investor and consumer confidence. Weaker consumer confidence will slow new marketing sales at the Meikarta project while uncertainty around the completion of units already sold could delay or reduce cash collection from customers.
Negative investor sentiment resulting from the allegations could aggravate Lippo Karawaci’s poor liquidity and further drive up the yield-to-maturity on the company’s outstanding US dollar bonds. As of 17 October, the yield-to-maturity on Lippo Karawaci’s 2022 and 2026 bonds has increased by an average of 8% since their date of issuance. This means Lippo Karawaci will have to pay more interest expense as it refinances its debt coming due over the next 12-18 months.
Lippo Karawaci has a relatively long-dated debt maturity profile compared with other Indonesian developers, but it has around IDR1.3 trillion ($90 million) of debt coming due in 2018 and 2019. This includes (1) IDR590 billion of bank loans with various local banks maturing in 2018 and 2019, and (2) a $50 million syndicated loan with UBS AG and Deutsche Bank that was originally due September 2018, but for which Lippo Karawaci has extended the maturity to April 2019.
Assuming Lippo Karawaci has to refinance IDR1.3 trillion of debt coming due in 2018 and 2019 at a higher cost, reflective of today’s yields, we expect the company’s interest burden to increase around 6% or IDR60 billion, which will add pressure on Lippo Karawaci’s already fragile liquidity position, given its cash burn rate of around IDR1.1 trillion and IDR1.3 trillion in 2018 and 2019, respectively.
“We analyze cash flow at the holding company level using Lippo Karawaci’s total consolidated cash flow and deduct the cash flow of Siloam International Hospitals Tbk (P.T.) and Lippo Cikarang, but include any intercompany cash flows such as proceeds from asset sales,” said Moody’s.
By adding, “We exclude the cash flows from these two subsidiaries because Lippo Karawaci’s consolidated financials reflect 100% of the subsidiaries even though it does not own 100% of these subsidiaries, and Lippo Karawaci has limited access to the subsidiaries’ cash flows.”
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