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Lippo Malls Indonesia Retail Trust -- Moody's places Lippo Malls Indonesia Retail Trust's ratings on review for downgrade

·15 mins read

Rating Action: Moody's places Lippo Malls Indonesia Retail Trust's ratings on review for downgrade

Global Credit Research - 02 Sep 2020

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

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.

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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.

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.

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.

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

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