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JAKARTA (TheInsiderStories) – Global rating assessor Moody’s Investors Service has downgraded the corporate family rating for Indonesian leading retailer PT Matahari Putra Prima Tbk (IDX: MPPA) to B3 from B2, amid heightened liquidity risk and a reduced financial flexibility to fund its operations.

The bad news is unlikely to stop there as Moody’s already placed the rating on review for futher downgrade.

“The downgrade reflects the heightened liquidity risk and reduced financial flexibility given MPPA’s non-compliance with some covenants, combined with weaker than expected operating performance, large near-term debt maturities, and limited availability to draw down further under its existing debt facilities,” Maisam Hasnain, a Moody’s Analyst, said in a statement on Thursday (05/04).

The international rating agency said with negative earnings and increased debt, MPPA’s credit profile has continued to weaken as it executes on a transformation strategy to revive operations, which include big price discounts and inventory rationalization.

Moody’s note that the potential benefits from its strategy are yet to be realized.

“The rating remains on review for downgrade given the potential for MPPA’s liquidity and credit metrics to deteriorate further, following its announcement to delay its planned rights issue,” adds Hasnain, Moody’s Lead Analyst for MPPA.

Delayed Rights Issue, Again

MPPA previously planned to complete an Rp 802 billion rights issue by April 2018, which proceeds were planned to fund working capital.

“However, Moody’s understands that the rights issue will likely be delayed by up to two months, because MPPA plans to use its full year 2017 financials in its rights issue prospectus. This is the second time that MPPA has delayed its rights issue,” Moody’s said.

“In the absence of rights issue proceeds, we expect MPPA will need to rely on incremental debt to fund its operations. As a result, MPPA’s adjusted leverage — as measured by adjusted debt to EBITDA — will increase to around 7.0x-8.0x by the end of 2018. Such leverage levels cannot support MPPA’s B3 rating,” Hasnain added.

Moody’s also estimates MPPA’s liquidity position will further weaken should the rights issue be delayed, as the company’s projected cash from operations will likely remain negative through 2018.

“Even with proceeds of Rp 802 billion from its planned rights issue, Moody’s estimates that MPPA will not have sufficient cash to fund its operations, scheduled debt maturities and capital spending through December 2018, because the majority of MPPA’s working capital facilities come due in December,” the rating agency said.

Nevertheless, Moody’s notes that MPPA has a track record of renewing these facilities when they come due. For example, in January 2018, MPPA extended its Rp 300 billion facility with Bank of China (Hong Kong) Limited by one year to January 2019, Moody’s said.

An inability to extend its next debt aturity: specifically, a Rp 195 billion working capital facility due in May 2018 would suggest a further
reduction in financial flexibility.

“MPPA has obtained waivers from all but one bank, and is in the process of obtaining a waiver from the remainin bank, following its inability to meet some of its financial maintenance covenants for the year ended December 2017. While Moody’s expects that MPPA will obtain all waivers before it releases its next quarterly financial results, a failure to do
so will result in further negative rating action,” Moody’s said.

The rating agency said its review will focus on MPPA’s ability to complete its Rp 802 billion rights issue by June 2018; obtain covenant waivers from one remaining bank and extend its next debt maturity.

Top Management Change

On the same day MPPA announced it has appointed Elliot J. Dickson as its new CEO and Djamel Derguini as new President.

Elliot Dickson is an American citizen with over 35 years of retailing and leadership experience. Most recently, Dickson served as COO of Walmart in China, responsible for 412 Hypermarkets and US$8 billion in revenues. He will serve effectively on 30 April 2018.

Meanwhile, Djamel Derguini, who will serve as President, is a French citizen, and has been with the Company since 2014. He brings more than 20 years of experience in the industry, and most recently served as COO of MPPA.

MPPA, which flies its Matahari Hypermart hypermarket chains offers multiple retail formats. The company operates in more than 70 Indonesian cities through 113 Hypermarts, 25 Foodmarts, 15 Express stores, 102 Boston Health & Beauty and four SmartClub
wholesale outlets.

Lippo Group’s PT Multipolar Tbk (IDX: MLPL), a holding company that owns majority stakes in retail, technology, media, and real estate investment companies in Indonesia and China, owns a 50.2% stake in MPPA.

Temasek Holdings Limited, through its subsidiary, Anderson Investment Pte. Ltd., has exchangeable rights in MPPA.

Email: elisa.valenta@theinsiderstories.com