JAKARTA (TheInsiderStories) – Moody’s has downgraded the corporate family rating of Lippo Malls Indonesia Retail Trust (LMIRT) to B1 from Ba3 with outlook negative. In addition, Moody’s has downgraded the backed senior unsecured rating on the bond issued by LMIRT Capital Pte. Ltd., a wholly-owned subsidiary of LMIRT, to B1 from Ba3. The bond is guaranteed by the trustee of LMIRT.
The downgrade reflects LMIRT’s increased refinancing risk, as the trust will be reliant on the proceeds from its divestment of Pejaten Village and Binjai Supermall, as well as external funding to address its 2021 debt maturity amid challenging market conditions for fund raising. The trust’s liquidity has weakened to levels no longer consistent with its Ba3 rating.
The negative outlook reflects our expectation that LMIRT’ credit metrics will weaken in 2020 because of the softer operating conditions caused by the virus outbreak and the volatility of the Indonesian Rupiah against the Singapore dollar that creates additional risk for the trust. Furthermore, the weakening of earnings could result in a breach of bank loans’ financial covenants in 2020, for which we expect the trust to require waivers from its lenders.
Without the divestment, Moody’s expects a 39 percent decline in LMIRT’ 2020 revenue caused by temporary malls closure and weaker demand for retail space. LMIRT’ adjusted net debt to EBITDA will weaken to around 12.4x in 2020 from 5.2x in 2019, and adjusted EBITDA to interest expense will weaken to around 1.2x from 3.0x over the same period.
At the same time, the trust’ short-term debt is expected to increase to around 24 percent of its total debt from 8 percent in 2019, as a result of the drawdown in its revolving credit facilities. Subsequently, Moody’s expects gradual recovery in the operating conditions and improvement in occupancy rates in 2021, resulting in adjusted net debt to EBITDA and EBITDA to interest expense to improve to 6.4x and 2.3x respectively.
LMIRT held cash and cash equivalents of S$145.7 million (US$104.82 million) at March, 31, 2020, which will be sufficient to cover the repayment of its S$75 million bond maturing in June 2020 and S$40 million revolving credit facility. Consequently, LMIRT will likely rely on external funding to address its S$175 million syndicated term loan maturing in August 2021 and its S$140 million of perpetual securities callable in September 2021.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The retail property sector has been one of the sectors affected by the shock given its sensitivity to consumer demand and sentiment.
More specifically, the expected weakening in LMIRT’ credit profile, including its exposure to Indonesia, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and the company remains vulnerable to the outbreak continuing to spread.
LMIRT is a real estate investment trust and has been listed on the Singapore Stock Exchange since November 2007. At end 2019, it had a portfolio of 23 retail malls and seven retail spaces across major cities in Indonesia, with a total appraised value of around S$1.8 billion.
by Junling Tan, an Analyst from Moody’s Investor Service