Report Contents

November 25, 2020

Lippo Malls Indonesia Retail Trust: Sponsoring the Sponsor

BY Warut Promboon

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( 6 mins)

Summary

Geography

Indonesia

Sector

Real estate investment trust

Credit rating

B1/NR (Moody’s/S&P)

Report date

23-NOV-2020

 

Executive Summary

Since our 28-May initiation report on Lippo Malls Indonesia Retail Trust (LMIRT)’s two perpetual bonds (LMRTSP 6.6% and 7% Perpetual (in SGD)) and LMRTSP 7.25% 6/24 (in USD)) with an Underweight recommendation, the perpetuals underperformed while the senior bonds outperformed. 

LMRTSP 6/24 outperformance is not justified and we believe headline risk on potential rating downgrades, cashflow uncertainties, and the use of LMIRT to sustain its sponsor (PT Lippo Karawaci (Lippo)) by buying its assets during the pandemic leaves us more questions than answers on whether LMIRT is for investors or the sponsor. That said, we reiterate our UNDERWEIGHT recommendation on the LMRTSP complex. 

LMIRT’s operating earnings were worse than expected as a result of the COVID-19 pandemic. Our liquidity calculation leads us to believe LMIRT does not have sufficient cash to call its LMRTSP 7% Perp next September. Even without the call on the perp, the trust’s decision to acquire new assets from Lippo, especially with financing and rights from Lippo, further constrains LMIRT’s financial flexibility. 

Financial Update

LMIRT’s EBITDA for the last 12 months ended in September dropped 35% on the COVID-19 lock-down and a drop in consumer spending. We understand the 35% drop exceeds a consensus analyst estimate of -25%. Current ratio in September was 0.6x versus 1.7x last December.

LMIRT had cash balance of SGD123.1mn at the end of September this year, versus SGD110m last December. The increase was partially due to a SGD97m proceed from divestments of Pejaten Village and Binjai Supermal. Assuming LMIRT’s EBITDA for the next 12 months ended September 2021 will remain the same as the previous 12 month’s level, together with new loans of SGD225m and rights issuance of SGD280m, we expect the trust to have only SGD47.5 in cash which is by no means sufficient to call on its SGD140m LMRTSP 7% Perp on 27-Sep-21.

 

EXHIBIT 1: LMIRT’s estimated liquidity position on 3Q 2021Lippo Malls Indonesia Retail Trust: Sponsoring the Sponsor 1Source: Company Data, Bondcritic Estimates

 

Total debt-to-12-month trailing EBITDA in September was 6.8x versus 4.5x last December and the 12-month trailing EBITDA-to-interest expense coverage was a mere 2.2x versus 3.9x during FY2019.

The Acquisition

LMIRT planned a SGD392.65-mn acquisition of Strata Title Units of Lippo Mall Puri from PT Mandiri Cipta Gemilang (MCG), a wholly-owned subsidiary of Lippo, a sponsor of LMIRT.  We understand the funding source will come from SGD120m of debt financing (SGD80m from bank loan and SGD40m from MCG) and SGD271m of LMIRT’s rights issue of SGD280m, fully underwritten by Lippo (EXHIBIT 2).

 

EXHIBIT 2: LMIRT’s Proposed Funding Structure

Lippo Malls Indonesia Retail Trust: Sponsoring the Sponsor 2

Source: Company Data

Despite a high occupancy ratio of Lippo Mall Puri, we see the acquisition at the time when LMIRT’s operations are negatively impacted by the COVID-19 pandemic as moral hazard between LMIRT and Lippo. In our judgment, LMIRT will not be able to afford this acquisition had it not been for the additional financing and a capital injection by Lippo. We see the sale of Lippo’s assets as benefiting Lippo rather than LMIRT. This acquisition is in a way the use of LMIRT to borrow in order to provide Lippo with a lifeline at the time when Lippo relies almost solely on asset sale to support its liquidity. By all means, we see the event as credit positive for Lippo, the receiver of cash and credit negative for LMIRT, the payer at the time when cash should be preserved for liquidity.

Rating Actions

Both Fitch and Moody’s have downgraded LMIRT’s issuer credit rating since our 28-May report. Moody’s downgraded the rating to B1 from Ba3 on 15-June to reflect rising refinancing risk on LMIRT’s asset sale and external funding to the address a debt maturity profile in 2021. The agency put LMIRT’s B1 rating on a downgrade review on 2-Sep, following LMIRT’s announcement on 31-Aug to update on its acquisition of Lippo Mall Puri from MCG. The 31-Aug announcement has the acquisition financing details which includes SGD40m in a loan from Lippo and SGD280m in rights issuance, fully underwritten by Lippo. The involvement of Lippo in the financing details, in our view, tightened-up the relationship between Lippo and LMIRT with the former having inferior credit ratings (Lippo’s B3 vs. LMIRT’s B1 by Moody’s).

The July downgrade was within our expectation of Moody’s pre-emptive downgrade at the time of uncertainty. Despite LMIRT’s successful asset sale and its ability to secure additional USD75m of a bank loan in October, we remain uncomfortable with LMIRT’s status as a savior of Lippo.  That said, we expect Moody’s downgrade review to result in Moody’s downgrade of LMIRT to B2 from B1 this year.

Fitch downgraded LMIRT’s issuer credit rating to BB- with a negative watch from BB on 4-Nov on the expectation of weakening financial metrics for a prolonged period as a result of the COVID-19 pandemic and a prolonged drop in a purchasing power for Indonesian consumers. Fitch said it could revise LMIRT’s outlook to stable should the trust’s Funds from Operations (FFO) to fixed charge coverage hovers at least 1.3x on a sustained basis. However, the ratio of below 1.3x for a sustained period could lead to a negative rating action which may include a downgrade. This ratio was at 0.24x during the last 12 months ended in September and we see an asymmetric downgrade possibility at Fitch by at least one notch to B+ from BB-.

Valuation

LMRTSP 6/24s (in USD) have outperformed beyond our expectation with its yield-to-worst (YTW) dropping to 8.5% (ask) (EXHIBIT 3). LMIRT’s two perpetual YTWs, however, rose c.250bps since our last report on 28-May to c.9% (ask) at the time of this report. We see the diversion in performance between LMRTSP 6/24s and the two perpetuals resulting from LMRTSP 6/24s’ USD denomination and its senior class status and the two perpetuals’ SGD denomination and their subordinated status. Having said that, we do not believe the rally on LMRTSP 6/24s is justified, given LMIRT’s liquidity and operational problems. As such, headline risk which includes a potential rating downgrade from Fitch and Moody’s leads us to maintain our UNDERWEIGHT recommendation on all of the LMRTSP complex.

 

EXHIBIT 3: Yield to Worst (%) of LMRTSP 6/24sLippo Malls Indonesia Retail Trust: Sponsoring the Sponsor 3Source: Bondsupermart

 

 

 

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