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Rating Action:

Moody's changes Lippo Karawaci's outlook to stable

14 Mar 2019

Singapore, March 14, 2019 -- Moody's Investors Service has affirmed the B3 corporate family rating of Lippo Karawaci Tbk (P.T.) and 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.

At the same time, Moody's changed the outlook on the ratings to stable from negative.

RATINGS RATIONALE

"The change in Lippo Karawaci's ratings outlook to stable from negative reflects our expectation that liquidity at the holding company level will improve following its rights issue, such that Lippo Karawaci will have sufficient cash to fund its operating cash needs and service its debt obligations over the next 12-18 months," says Jacintha Poh, a Moody's Vice President and Senior Credit Officer.

"The underwritten rights issue demonstrates the strong commitment from the Riady family to support Lippo Karawaci's effort to reduce debt and complete existing projects under construction," adds Poh, who is Moody's Lead Analyst for Lippo Karawaci.

On 12 March 2019, Lippo Karawaci announced that the company will raise around $730 million from a rights issue that is underwritten by its promoter, the Riady family. The rights issue is expected to complete during the first half of 2019, but Lippo Karawaci will receive cash of $280 million in March 2019 through a non-interest-bearing, non-refundable advanced subscription.

The company will further raise (1) $20 million from the sale of two healthcare joint ventures in Myanmar to OUE Lippo Healthcare Limited, expected to complete during the first half of 2019, and (3) $260 million from the sale of Lippo Mall Puri to Lippo Malls Indonesia Retail Trust, expected to complete during the second half of 2019.

Lippo Karawaci intends to use and set aside around (1) $275 million of the proceeds raised towards debt reduction via a fixed-price tender offer of up to $150 million on its $410 million 7% notes due April 2022 and $425 million 6.95% notes due October 2026, and $125 million for repayment of debt maturing in 2019 and 2020; (2) $315 million for the payment of rental obligations to its real estate investment trusts (REITs), interest expenses and working capital needs in 2019 and 2020; (3) $100 million for construction of existing projects; (4) $200 million to support the development of its Meikarta project; and (5) $120 million for costs and funding related to the sale of Lippo Mall Puri.

Lippo Karawaci's near term refinancing risk will be alleviated because funds will be set aside to repay the company's debt maturities in 2019 and 2020.

As of 31 December 2018, Lippo Karawaci had around IDR2.5 trillion of debt coming due in 2019 and 2020. This total includes (1) IDR660 billion of bank loans with various local banks maturing in 2019 and 2020; (2) a $50 million syndicated loan with UBS AG and Deutsche Bank maturing in April 2019; and (3) $75 million in private placement notes maturing in June 2020.

Lippo Karawaci will use $100 million of the proceeds to complete construction of existing key projects at the holding company level, but Moody's does not expect these projects to contribute significant cash flows until 2020 because sales will remain lackluster in 2019 owing to weak market sentiment.

Assuming no new project launches, Moody's expects Lippo Karawaci to generate negative operating cash flows of around IDR3.5 trillion ($240 million) in 2019 and around IDR3 trillion in 2020 at the holding company level. Despite this situation, the holding company's cash needs can be met by the proceeds from its rights issue and asset divestments.

Moody's analyze cash flow at the holding company using Lippo Karawaci's consolidated cash flows excluding the cash flows of Siloam International Hospitals Tbk (P.T.) and Lippo Cikarang Tbk (P.T.), but including any intercompany cash flows such as proceeds from asset sales.

Moody's views Lippo Karawaci's $200 million investment into Meikarta, through its 54%-owned Lippo Cikarang Tbk (P.T.), as credit negative because the holding company's partial ownership of the project limits its ability to access funds in their entirety. Further, the project is currently in a growth phase. Hence Moody's expects operating cash flows to remain negative over the next three to five years.

Lippo Karawaci's B3 corporate family rating reflects the company's reliance on asset sales and external funding, which stems from the weakness in its core property development business, because it has not launched a new project since 2016 at the holding company level.

The stable outlook reflects Moody's expectation that Lippo Karawaci will have sufficient cash to fund its operating cash needs and service its debt obligations over the next 12-18 months.

Lippo Karawaci's ratings are unlikely to be upgraded as long as the company's ability to service its debt is contingent upon its ability to execute assets sales. However, positive momentum could build if there is an improvement in company's core property development business, such that successful project launches result in higher operating cash flows at the holding company level.

On the other hand, the ratings could be downgraded if (1) operating cash flow deteriorates at the holding company level and results in the weakening of Lippo Karawaci's liquidity, and (2) there are signs of cash leaking from Lippo Karawaci to fund affiliated companies, for example, through intercompany loans, aggressive cash dividends, or investments in affiliates. Lippo Karawaci's senior unsecured bond rating could also undergo a downgrade if debt is incurred at its subsidiaries.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Lippo Karawaci Tbk (P.T.) is one of the largest listed property company in Indonesia, with a sizable land bank of around 1,297 hectares as of 31 December 2018. It owns and/or manages — either directly or via its real estate investment trusts — 51 malls, 35 hospitals and ten hotels. Lippo Karawaci also owns a 11% stake in First REIT and a 31% stake in Lippo Malls Indonesia Retail Trust.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
VP - Senior Credit Officer
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

Laura Acres
MD - Corporate Finance
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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