Singapore, June 15, 2020 -- Moody's Investors Service has downgraded the corporate family rating
of Lippo Malls Indonesia Retail Trust (LMIRT) to B1 from Ba3.
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 outlook on all ratings remains negative.
RATINGS RATIONALE
"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," says Junling Tan, a Moody's Analyst.
"The negative outlook reflects our expectation that LMIRT's credit
metrics will weaken in 2020 because of the softer operating conditions
caused by the coronavirus outbreak, and the volatility of the Indonesian
rupiah against the Singapore dollar 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," adds Tan.
Without the divestment, Moody's expects a 39% decline in
LMIRT's 2020 revenue caused by temporary malls closure and weaker
demand for retail space. LMIRT's 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's short-term debt is expected to increase to around
24% of its total debt from 8% 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/EBITDA
and EBITDA/interest expense to improve to 6.4x and 2.3x
respectively.
LMIRT held cash and cash equivalents of SGD145.7 million at 31
March 2020, which will be sufficient to cover the repayment of its
SGD75 million bond maturing in June 2020 and SGD40 million revolving credit
facility. Consequently, LMIRT will likely rely on external
funding to address its SGD175 million syndicated term loan maturing in
August 2021 and its SGD140 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's 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.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action reflects the impact on LMIRT of the
breadth and severity of the shock, and the broad deterioration in
credit quality it has triggered.
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%
stake in the trust.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative ratings outlook, an upgrade is unlikely over
the next 12-18 months. Nonetheless, the outlook could
return to stable if the trust (1) improves its liquidity, such that
cash balances and committed facilities are sufficient to cover operating
cash needs and debt repayments over the next 12-18 months;
and (2) executes its business plans and maintains adjusted net debt/EBITDA
below 7.0x.
On the other hand, LMIRT's ratings could be downgraded if:
(1) the operating environment deteriorates, leading to higher vacancy
levels and declining operating cash flows or falling asset valuations;
(2) the trust's credit metrics weaken, with adjusted net debt/EBITDA
exceeding 7.0x-7.5x or adjusted EBITDA/interest expense
falling below 2.0x; or (3) the trust fails to execute its
planned asset sales or arrange for refinancing its debt maturing over
next 12 months; or (4) there is a breach in financial covenants under
the trust's bank loans without corresponding waivers from its lenders
resulting in further weakening of its liquidity profile and ability to
access capital.
The principal methodology used in these ratings was REITs and Other Commercial
Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Lippo Malls Indonesia Retail Trust (LMIRT) is a real estate investment
trust and has been listed on the Singapore Stock Exchange since November
2007. At 31 December 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 SGD1.8 billion.
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
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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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
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
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for additional regulatory disclosures for each credit rating.
Junling Tan
Analyst
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
