Singapore, September 02, 2020 -- Moody's Investors Service has placed on review for downgrade the
B1 corporate family rating (CFR) of Lippo Malls Indonesia Retail Trust
(LMIRT).
In addition, Moody's 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 LMIRT.
The outlook on all ratings has been changed to rating under review from
negative.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
The review for downgrade follows LMIRT's announcement on 31 August
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 Lippo Karawaci Tbk (P.T.) (Lippo Karawaci,
B3 stable). Lippo Karawaci is also a sponsor of LMIRT.
The total consideration for the proposed acquisition is around SGD400
million, of which SGD280 million will be paid via rights issuance
fully underwritten by Lippo Karawaci and SGD120 million will be funded
via new bank loans. Lippo Karawaci will potentially provide a loan
of up to SGD40 million if the final bank loan is less than the proposed
amount.
"The review for downgrade reflects LMIRT's increasing linkages
with Lippo Karawaci, which has a weaker credit profile, in
light of the planned acquisition -- whereby Lippo Karawaci's
shareholding in LMIRT could increase significantly," says
Junling Tan, a Moody's Analyst.
"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," adds Tan, who is also Moody's
Lead Analyst for LMIRT. "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 (1) the acquisition's funding
structure; (2) the extent and impact of linkages between LMIRT and
Lippo Karawaci post-acquisition; and (3) the progress on LMIRT's
ability to refinance its debt due in 2021 and obtain covenant waivers.
Moody's expects to conclude the review within 60-90 days.
Moody's expects a 46% decline in LMIRT's 2020 revenue caused by
temporary mall closures 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 19% of its total debt from 8% 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's
adjusted net debt/EBITDA and EBITDA/interest expense to improve to 6.9x
and 2.0x respectively in 2021.
LMIRT's liquidity is weak. The trust held cash and cash equivalents
of SGD47 million at 30 June 2020 and received divestment proceeds of around
SGD97 million in August 2020. This is against its SGD175 million
syndicated term loan maturing in August 2021 and its SGD140 million of
perpetual securities callable in September 2021. As such,
LMIRT 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%
stake in the trust.
Moody's could downgrade LMIRT's rating by at least one notch if:
(1) the acquisition goes ahead with its planned funding structure,
leading to increased linkage between LMIRT and Lippo Karawaci; (2)
the trust fails to arrange refinancing for its 2021 debt maturities over
the next 60 to 90 days; (3) there is a breach in financial covenants
under the trust's bank loans without corresponding waivers from lenders,
resulting in a further weakening in its liquidity profile and ability
to access capital; (4) the operating environment deteriorates,
leading to higher vacancy levels and declining operating cash flow or
falling asset valuations; or (5) 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, beyond
2020.
On the other hand, the rating could be confirmed at the current
level if (1) the proposed acquisition does not go ahead; (2) LMIRT
improves its liquidity, such that its cash balances and committed
facilities are sufficient to cover operating cash needs and debt repayments
over the next 12-18 month; (3) it obtains corresponding financial
covenant waivers from its lenders; and (4) its adjusted net debt/EBITDA
remains below 7.0x-7.5x or adjusted EBITDA/interest
expense remains above 2.0x, both on a sustained basis.
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 July 2020, it had a portfolio of 21 retail malls
and seven retail spaces across major cities in Indonesia, with a
total appraised value of around SGD1.5 billion.
REGULATORY DISCLOSURES
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Junling Tan
Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Vikas Halan
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
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Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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