Singapore, April 28, 2017 — Moody’s Investors Service has downgraded to B1 from Ba3 the corporate family rating of Lippo Karawaci Tbk (P.T.) and the senior unsecured rating of the bonds issued by Theta Capital Pte. Ltd. — guaranteed by and a wholly owned subsidiary of Lippo Karawaci. At the same time, Moody’s has changed the outlook to stable from negative.
“The downgrades reflect the weak operating performance of Lippo Karawaci’s property development business, led by continued delays in its new
project launches and uncertainty over the completion of its targeted asset sales in 2017. Consequently, we expect the developer’s financial
profile will remain outside the parameters of its Ba3 corporate family rating over at least next 12-18 months,” says Jacintha Poh, a Moody’s
Vice President and Senior Analyst.
Lippo Karawaci achieved only IDR1.2 trillion of marketing sales in 2016, significantly below its target of IDR3.5 trillion. The developer also
completed only IDR938 billion of asset sales compared to its target of IDR1.7 trillion for the same year.
While the developer targets to achieve IDR3.1 trillion of marketing sales and IDR6.8 trillion of asset sales in 2017, Moody’s believes those
targets are optimistic and expects the developer to lower its targets in the second half of this year.
The developer has not launched any new projects since the beginning of this year, as it did not receive sufficient demand for priority passes
at its key project, Urban Homes — a residential property development targeting the lower-middle income group. Indonesian developers typically
use sales of priority passes to gauge market demand before deciding on a new launch.
Moody’s base case expectation is for Lippo Karawaci to achieve marketing sales of IDR2 trillion and complete asset sales of IDR0.8 trillion in
2017. Hence, Moody’s expects its leverage — as measured by adjusted debt/homebuilding EBITDA — in 2017 to be around 5.0x and its interest
coverage ratio — as measured by adjusted homebuilding EBIT/interest expense — to be around 2.0x.
For the full year 2016, the developer recorded adjusted debt/homebuilding EBITDA of 3.9x and adjusted homebuilding EBIT/interest expense of 2.2x.
“Lippo Karawaci’s B1 rating is supported by its diversified business profile — which allows it to generate a well-balanced stream of
recurring revenue from multiple business segments — and non-recurring revenue from real estate development,” adds Poh, who is also the Lead
Analyst for Lippo Karawaci and the Indonesian real estate sector.
The bulk of Lippo Karawaci’s recurring income comes from the resilient and growing healthcare segment, which provides a cushion against the
business and execution risks associated with real estate development, while also partly mitigating the lumpy nature of development cash flows.
In addition, Lippo Karawaci has no near-term refinancing risk. Its next major debt maturity will only be in 2022, after the call redemption of
its USD403 million notes due 2020 in November 2016. The stable ratings outlook reflects Moody’s expectation that Lippo
Karawaci will remain well-supported by its recurring income and maintain financial discipline while pursuing growth.
The ratings are unlikely to be upgraded over the near term given its weak marketing sales. However, positive momentum could build if Lippo
Karawaci shows progress in achieving marketing sales of at least IDR3 trillion in 2017 and demonstrates its ability to maintain a stable
financial profile, such that adjusted debt/homebuilding EBITDA is below 4.0x and adjusted homebuilding EBIT/interest expense is above 3.0x.
On the other hand, the ratings could be downgraded if Lippo Karawaci’s financial and liquidity profile weaken owing to: (1) a failure to
execute its business plans, (2) a further reduction in its ownership of Siloam International Hospitals Tbk PT (unrated) to below 60%, (3) a
deterioration in the property market, leading to protracted weakness in its operations and credit profile, and (4) a material depreciation in the
rupiah, which may increase the company’s debt-servicing obligations.
Metrics indicative of downward rating pressure include adjusted debt/EBITDA above 5.5x and adjusted homebuilding EBIT/interest expense
below 2.0x on a sustained basis.
Lippo Karawaci Tbk (P.T.) is one of the largest property developers in Indonesia, with a sizable land bank of around 1,330 hectares as of 31
December 2016. It owns and/or manages — either directly or via its real estate investment trusts — 46 malls, 23 hospitals and nine hotels. Lippo
Karawaci owns a 33% stake in First REIT (unrated) and a 29% stake in Lippo Malls Indonesia Retail Trust (Baa3 stable).