Lippo Malls Indonesia Retail Trust (LMIRT) raised S$281 million (US$211.28 million) after issued 53.84 percent of the total units - Photo by Lippo Group

JAKARTA (TheInsiderStories) – Moody’s Investors Service has placed on review for downgrade the B1 corporate family rating of Lippo Malls Indonesia Retail Trust (LMIRT). The agency also has placed on review for downgrade the B1 rating on the backed senior unsecured bond issued by LMIRT Capital Pte. Ltd., a wholly-owned subsidiary of LMIRT.

The bond is guaranteed by the trustee of the real estate investment trusts manager. The outlook on all ratings has been changed to rating under review from negative.

The review for downgrade follows its announcement on August 31, 2020, in which the trust provided an update on its plan to acquire Lippo Mall Puri from PT Mandiri Cipta Gemilang, a wholly-owned subsidiary of PT Lippo Karawaci Tbk (IDX: LPKR, B3 stable). The parent is also a sponsor of LMIRT.

The total consideration for the proposed acquisition is around S$400 million (US$294.12 million), of which S$280 million will be paid via rights issuance fully underwritten by holding company, and S$120 million will be funded via new bank loans. Lippo Karawaci will potentially provide a loan of up to S$40 million if the final bank loan is less than the proposed amount.

“The review for downgrade reflects LMIRT’ increasing linkages with Lippo Karawaci, which has a weaker credit profile, in light of the planned acquisition, whereby Lippo Karawaci’ shareholding in LMIRT could increase significantly,” says Junling Tan, a Moody’s Analyst in the latest report.

He continued, “In addition, the acquisition comes at a time when LMIRT is already facing heightened liquidity risk and a weak operating environment given coronavirus disruptions, signaling management’s growing appetite for risk. There is also the risk that the trust’s weakening earnings could lead to a breach of financial covenants in its bank loans in 2020, for which we expect it to obtain waivers from lenders.

Moody’s review will focus on the acquisition’ funding structure, the extent and impact of linkages between both parties post-acquisition, and the progress on LMIRT’ ability to refinance its debt due in 2021 and obtain covenant waivers. Moody’s expects to conclude the review within 60 – 90 days.

According to the agency, a 46 percent decline in LMIRT‘ 2020 revenue caused by temporary mall closures and weaker demand for retail space. It adjusted net debt/EBITDA will weaken to around 12.4x in 2020 from 5.2x in 2019, and adjusted EBITDA/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 19 percent of its total debt from 8 percent in 2019, as a result of the drawdown in its revolving credit facilities. But Moody’s expects a gradual recovery in operating conditions and an improvement in occupancy rates in 2021, resulting in LMIRT’ adjusted net debt/EBITDA and EBITDA/interest expense to improve to 6.9x and 2.0x respectively in 2021.

He said, LMIRT‘ liquidity is also weak. The trust held cash and cash equivalents of S$47 million at June, 30, 2020 and received divestment proceeds of around S$97 million in August 2020. This is against its S$175 million syndicated term loan maturing in August 2021 and its S$140 million of perpetual securities callable in September 2021. As such, the company will likely rely on external funding to address it upcoming maturities.

Moody’s has also taken into consideration the governance risk stemming from related-party transactions between LMIRT and the Lippo group of companies. This risk is partially mitigated by the regulatory oversight provided by the Monetary Authority of Singapore and exercised through the board, which mostly consists of independent directors.

Furthermore, there is an alignment of interest between LMIRT and its sponsor, Lippo Karawaci, because the latter has a 32 percent stake in the trust.

US$1: S$1.36

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