Moody’s Downgrades Lippo Malls Indonesia Retail Trust to Ba1

Outlook negative

LippoMall, Kemang Village (Image credit : Lippo Mall)

JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded its rating for Lippo Malls Indonesia Retail Trust (LMIRT) to a non-investment grade corporate family rating of Ba1 from an investment-grade issuer rating of Baa3.

Consequently, LMIRT’s Baa3 issuer rating has been withdrawn and the company has been assigned a Ba1 corporate family rating. The rating outlook is negative.

The rating action concludes Moody’s review of the company’s rating for downgrade, which was initiated on Dec. 21, 2017, and prompted by the deteriorating credit quality of key entities within the Lippo group that contribute around one-third of LMIRT’s total revenue.

Ratings Rationale

“Our downgrade of LMIRT’s rating was driven by a weakening of the trust’s
financial metrics and its significant exposure to the key entities within the Lippo group, whose credit quality are deteriorating,” says Jacintha Poh, a Moody’s Vice President and Senior Analyst.

At 31 December 2017, LMIRT’s adjusted debt/total deposited assets increased to 41 per cent; a result which exceeded Moody’s downward rating threshold of 40 per cent, because of the trust’s aggressive debt-funded acquisitions and the weaker Indonesian rupiah against the Singapore dollar.

For comparability, Moody’s has treated half of LMIRT’s SGD260 million
perpetual security as debt and the other half as equity. However, following today’s downgrade of LMIRT’s rating to non-investment grade, Moody’s will treat all of the trust’s perpetual security as debt, resulting in adjusted debt/total deposited assets of 48 per cent at Dec. 31, 2017.

Over the next 12-18 months, Moody’s expects that LMIRT’s adjusted debt/total deposited assets will measure around 50 per cent.

Moody’s points out that LMIRT’s reported debt/assets of 34 per cent at Dec. 31, 2017 was well below the Monetary Authority of Singapore’s requirement of 45 per cent, because all of its perpetual security was deemed equity instead of debt.

LMIRT is closely linked to the Lippo Group of companies, due to these companies’ roles as sponsor, property pipeline provider, REIT manager, property manager and tenants.

The exposure is credit negative, particularly given the deteriorating credit quality of key entities within the group, namely PT Lippo Karawaci Tbk (B1 negative) (IDX:LPKR) and PT Matahari Putra Prima Tbk (B1 stable) (IDX:MPPA).

Over the next 12-18 months, Moody’s expects that LMIRT will continue to derive a third of its revenue from the Lippo group of companies, particularly after the trust extended the master lease agreement at Lippo Mall Kemang with Lippo Karawaci for a further two years until the end of 2019.

“The negative rating outlook reflects LMIRT’s increased refinancing risk, because the trust used a short-term credit facility of SGD80 million to partially finance its acquisitions of two retail malls in December 2017,” adds Poh, who is also Moody’s Lead Analyst for LMIRT.

LMIRT’s proportion of short-term debt against total debt increased to around 39 per cent at Dec. 31, 2017 from around 28 per cent at Sept. 30, 2017. In 2018, LMIRT will need to address S$270 million of debt maturities consisting of SGD80 million in revolving credit facilities, S$100 million in medium-term notes due in November 2018, and S$90 million of secured loans due in December 2018.

While the trust has demonstrated a track record of refinancing its debt maturities, it may not continue to do so, if market liquidity tightens unexpectedly.

LMIRT’s rating is unlikely to be upgraded over the next 12-18 months given the negative outlook, but Moody’s could change the outlook to stable if LMIRT addresses its 2018 maturities promptly and reduces its proportion of short-term debt to total debt to less than 15 per cent.

The rating could be downgraded if: (1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flow; (2) the transactions with the Lippo group of companies increases; (3) LMIRT’s financial metrics deteriorate, with adjusted debt/total deposited assets exceeding 50 per cent and adjusted EBITDA/interest
coverage falling below 3x; or (4) LMIRT fails to address its 2018 debt maturities promptly.

LMIRT is a real estate investment trust, listed on the Singapore Stock Exchange since November 2007. At 31 December 2017, 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$1.9 billion.

LMIRT is sponsored by PT Lippo Karawaci Tbk, which owns a 29.99 per cent
stake in the trust. LMIRT is managed by LMIRT Management Ltd, while its properties are managed by PT Lippo Malls Indonesia. The latter two companies are wholly-owned subsidiaries of Lippo Karawaci.