JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded the corporate family rating of Lippo Karawaci Tbk (P.T.) to B3 from B2.
Moody’s has also downgraded the backed senior unsecured rating of the bonds issued by Theta Capital Pte. Ltd., a wholly-owned subsidiary of Lippo Karawaci, to B3 from B2. The bonds are guaranteed by Lippo Karawaci and some of its subsidiaries.
The rating outlook is negative.
“The downgrade reflects our expectation that Lippo Karawaci’s operating cash flows at the holding company level will weaken further over the next 12-18 months, such that the company’s ability to service its debt servicing obligations will be subject to its ability to execute asset sales,” says Jacintha Poh, a Moody’s Vice President and Senior Analyst.
As part of its asset sales plan, on 18 September 2018, Lippo Karawaci announced the sale of (1) its 100%-stake in Bowsprit Capital Corporation Limited, which in turn owns 7% of First REIT, to OUE Limited and OUE Lippo Healthcare Limited for SGD99 million; and (2) its 10.6%-stake in First REIT to an indirect wholly-owned subsidiary of OUE Lippo Healthcare Limited for SGD103 million.
“Lippo Karawaci will receive a liquidity boost of SGD202 million (IDR2.2 trillion) in November 2018, if the sale is completed. However, these sales do not address the fundamental weakening of Lippo Karawaci’s operating cash flows,” says Poh, who is Moody’s Lead Analyst for Lippo Karawaci.
“We also estimate that the added liquidity will only be sufficient to cover the company’s cash needs until September 2019 given the company cash burn rate of around IDR1.1 trillion in 2018 and around IDR1.3 trillion in 2019,” adds Poh.
Moody’s expects Lippo Karawaci to continue generating negative operating cash flows at the holding company level — that is, total consolidated cash flows excluding the cash flows of the key listed subsidiaries, Siloam International Hospitals Tbk (P.T.) and Lippo Cikarang Tbk (P.T.), but including any intercompany cash flows (dividends and proceeds from asset sales) — over the next 12-18 months.
Moody’s expectation of negative operating cash flows at the holding company level is driven by (1) lackluster marketing sales of inventories; (2) a decline in asset management fees from the sale of Bowsprit Capital Corporation, manager of First REIT Limited; (3) a decline in dividend cash flows from its Singapore-listed real estate investment trusts owing to its reduced stake in First REIT and weaker dividends per unit from Lippo Malls Indonesia Retail Trust; as well as (4) higher interest expense on its US dollar debt as a result of the weaker Indonesian rupiah against the US dollar and higher cost of debt.
Further, Lippo Karawaci remains exposed to refinancing risk because there is insufficient liquidity to address its total outstanding debt maturities in 2018 and 2019.
As of 31 March 2018 — and proforma for the partial refinancing of its syndicated loan with UBS AG and Deutsche Bank — Lippo Karawaci had around IDR1.3 trillion 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) the remaining $50 million a 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.
The negative outlook reflects uncertainty around the execution of Lippo Karawaci’s asset sales, which could result in a further deterioration of the holding company’s liquidity over the next 12-18 months.
Given the negative outlook, Lippo Karawaci’s ratings are unlikely to be upgraded over the next 12-18 months. The outlook is unlikely to return to stable as long as the company’s ability to service its debt is contingent upon its ability to execute assets sales. Improvement in company’s core property development business with successful project launches that results in higher operating cash flows at the holding company level could stem the downward rating pressure.
On the other hand, the ratings could be further downgraded if operating cash flow continues to deteriorate at the holding company level and result in further weakening of Lippo Karawaci’s liquidity. This situation could arise if the company fails to execute further asset sales of at least IDR2.0 trillion over the next six months.
Lippo Karawaci’s senior unsecured bond rating could also be lowered if debt is incurred at its subsidiaries.
Lippo Karawaci Tbk (P.T.) is one of the largest listed property company in Indonesia, with a sizable land bank of around 1,327 hectares as of 31 March 2018. It owns and/or manages — either directly or via its real estate investment trusts — 48 malls, 33 hospitals and nine hotels. Lippo Karawaci also owns a 28% stake in First REIT and a 30% stake in Lippo Malls Indonesia Retail Trust.
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