AFTER downgrading Lippo Malls Indonesia Retail Trust’s (LMIRT) long-term issuer default rating to “CCC-” from “CCC” in April, Fitch Ratings has placed the Indonesia-focused real estate investment trust (Reit) on its “rating watch negative” list.

This is to reflect Fitch’s view that LMIRT’s proposed tender offer and consent solicitation exercise constitute a distressed debt exchange, said the ratings agency on Thursday (Dec 14).

It also believes LMIRT’s rating is likely to be downgraded to “C” if the consent solicitation exercises are successful, and if the tender offer is accepted by investors.

Based on Fitch’s ratings scales, a “CCC” rating signifies substantial credit risk with a very low margin for safety, with default as a “real possibility”. In comparison, the lower “C” rating points to a near default – where a default, or default-like process has begun. 

To recap, LMIRT on Dec 11 launched tender offers related to its outstanding 7.25 per cent senior notes due 2024, and 7.5 per cent senior notes 2026. Under the offers, the trust proposed to repurchase its 2024 notes at US$765 per US$1,000, and the 2026 notes at US$665 per US$1,000 via a fixed-price offer.

It also launched consent solicitation exercises related to proposed amendments to indentures of the notes, which currently prevent LMIRT from pledging its assets as security for debt financing.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Fitch said the overall transaction will lead to a material reduction in terms for existing unsecured noteholders – and, in turn, help the trust to avoid a default on its US dollar-denominated notes, given LMIRT’s “untenable liquidity profile”.

“The ‘rating watch negative’ (status) reflects the uncertainty that the majority of noteholders by outstanding principal may not consent to the proposed covenant amendments,” it added.

The agency also foresees an increase in secured debt for the trust with its proportion of pledged assets estimated to increase to around 45 per cent of total investment property, assuming its proposed loan of 2.5 trillion rupiah (S$214.3 million) is fully drawn down to fund the tender offer.

“This leads to a rise in legal and structural subordination for unsecured holders of the remaining stub, who will rank behind these secured creditors,” noted the agency.

A stub refers to residual equity created after a company’s restructuring or bankruptcy.

“Following the tender offer, we expect a remaining stub on the 2024 and 2026 notes, as the secured loan is not sufficient to buy back all the outstanding notes.”

Fitch is forecasting LMIRT to report net property income of S$123 million in 2024 – similar to 2023 estimates, and less than that of 2022 due to lower occupancy rates.

“We expect occupancy to only improve gradually, as it will take time for LMIRT to find alternative tenants to fill the vacancies. We expect its operations to improve from 2025, when redevelopment activities at several malls are expected to be completed.”

It however cautioned that the Reit remains exposed to high foreign exchange risks as its revenue is generated solely in rupiah, whereas its debt is denominated in US and Singapore dollars.

“Further rupiah depreciation will reduce the value of cash flow and assets in Singapore dollars, increasing pressure on interest coverage and the loan-to-value ratio.”

Units of LMIRT were trading S$0.0001 or 5 per cent lower at S$0.019 as at the midday break on Friday.