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Rating Action:

Moody's changes Lippo Karawaci's outlook to positive, affirms B3 rating

23 Nov 2021

Singapore, November 23, 2021 -- Moody's Investors Service has affirmed the B3 corporate family rating of Lippo Karawaci Tbk (P.T.).

At the same time, Moody's has affirmed the B3 backed senior unsecured rating of the bonds issued by Theta Capital Pte. Ltd., a wholly-owned subsidiary of Lippo Karawaci. The bonds are guaranteed by Lippo Karawaci and some of its subsidiaries.

Moody's has also changed the outlook on all ratings to positive from stable.

"The rating affirmation with a change in outlook to positive reflects our expectation of an improvement in Lippo Karawaci's operating cash flow at the holding company level over the next 12-18 months, mainly driven by strong growth in its core marketing sales, the construction completion of its legacy projects and a reduction in rental payments to First REIT," says Jacintha Poh, a Moody's Senior Vice President.

"We expect Lippo Karawaci's net cash flow from its property development business and dividend cash flows from its key operating subsidiaries to be sufficient to meet rental and interest payments at the holding company level over the next 12-18 months, such that it does not need to rely on one-off asset sales," adds Poh.

RATINGS RATIONALE

Lippo Karawaci's marketing sales were IDR4.4 trillion in the first 10 months of 2021 (10M 2021), comprising IDR3.2 trillion of sales at the holding company level. This marketing sales achievement has exceeded Moody's initial estimate of around IDR3.5 trillion; hence, Moody's now estimates Lippo Karawaci's 2021 marketing sales to be around IDR4.7 trillion.

Given most of Lippo Karawaci's projects are focused on the mass-market residential segment, which Moody's expects demand from homebuyer to remain strong, the company's 2022 marketing sales will increase to around IDR5.2 trillion.

Around 75% of Lippo Karawaci's marketing sales in 10M 2021 are from projects held at the holding company level, and Moody's expects the same proportion in 2021 and 2022. The rise in marketing sales will lead to growth in cash flow from the company's property development business, such that the company does not need to rely on one-off asset sales.

Lippo Karawaci's liquidity at the holding company level will be good over the next 12-18 months. As of 30 September 2021, Lippo Karawaci had cash and cash equivalents of around IDR2.3 trillion at the holding company level and Moody's expects it will generate positive operating cash flow of around IDR100 billion in 2022. Lippo Karawaci will also have sufficient cash to repay its short-term loan facilities, although the company will likely continue to roll over the loans and keep a larger cash buffer.

The positive operating cash flow in 2022 is supported by stronger cash collection given the growth in marketing sales and lower construction spending following the completion of its legacy projects; higher dividend cash flows because Lippo Karawaci's key operating subsidiaries, 55%-owned Siloam International Hospitals Tbk (P.T.) and 84%-owned Lippo Cikarang (P.T.), have started to pay dividends; and a reduction in rental payments to First REIT.

In terms of environmental, social and governance (ESG) risks, Moody's has considered Lippo Karawaci's weak execution track record, which resulted in liquidity pressure that was relieved by an IDR11.2 trillion rights issue backed by the Riady family in 2019. The current management team, led by John Riady, was put in place following the rights issue. Over the past two years, this management team met all the milestones it set in 2019, but the track record remains short.

Moody's has also considered the founding family's concentrated ownership of Lippo Karawaci. However, this risk is mitigated by the oversight exercised through the presence of strategic minority shareholders on the board and partially balanced by demonstration of support from its key shareholder.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Lippo Karawaci's rating could be upgraded if the company continues to improve its core property development business, such that operating cash flow at the holding company level is positive without relying on any one-off asset sales; the company reduces debt at the holding company level; and liquidity stays good over the next 12-18 months.

Lippo Karawaci's rating could be downgraded if operating cash flow deteriorates at the holding company level, weakening liquidity; and if there are signs of cash leakage from Lippo Karawaci to affiliated companies, for example, through intercompany loans, aggressive cash dividends or investments in affiliates. The senior unsecured bond rating could also be downgraded if debt is incurred at its subsidiaries.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Lippo Karawaci Tbk (P.T.) and its subsidiaries are engaged in the development, management and operation of retail malls, hospitals, hotels, condominiums, and residential townships across multiple cities in Indonesia. Lippo Karawaci also manages Lippo Malls Indonesia Retail Trust (B1 negative), a real estate investment trust (REIT) listed on the Singapore Stock Exchange, in which it owned a 58% stake as of 30 September 2021.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jacintha Poh
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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