Moody's reviewing Lippo Malls Retail Trust rating for possible downgrade to junk

MOODY'S Investors Service has placed the "Baa3" rating of Lippo Malls Indonesia Retail Trust (LMIRT) on review for downgrade, which could send the real estate investment trust (Reit) into junk territory.

The credit rating agency cited the deteriorating credit quality of key entities within the Lippo group, which contribute around one-third of the trust's revenue, for the review.

LMIRT's "Baa3" rating is the lowest investment-grade rating by Moody's. If the Reit's credit rating enters junk territory, that might raise its borrowing costs.

The Reit is closely linked to the Lippo group of companies, due to these companies' roles as sponsor, property pipeline provider, Reit manager, property manager and tenants.

Moody's said that the exposure is "credit negative", as Moody's had also downgraded both Lippo Karawaci's "B1 stable" rating and Matahari Putra Prima's "B1 stable" rating this year.

Over the next 12 to 18 months, Moody's expects that LMIRT will continue to derive a third of its revenue from the Lippo group of companies, particularly after the trust extended the master lease agreement at Lippo Mall Kemang with Lippo Karawaci for a further two years until the end of 2019.

Jacintha Poh, Moody's vice-president and senior analyst, said: "We expect that LMIRT's financial metrics will weaken, on the back of aggressive acquisitions, such that the trust will prove more vulnerable to foreign exchange rate fluctuations and asset devaluations."

"The trust also faces high refinancing risk with around 30 per cent of its total debt coming due in 2018."

LMIRT's leverage will also increase following the proposed debt-funded acquisitions of two retail malls, Lippo Plaza Jogja and Kediri Town Square, S$98.1 million, which are scheduled to complete by the end of 2017.

Financial metrics

Specifically, the trust's pro-forma adjusted debt to total deposited assets will increase to 39 per cent from 36 per cent at Sept 30, 2017, and its adjusted net debt to normalised Ebitda (earnings before interest, taxes, depreciation and amortization) will weaken to 4.1 times from 3.7 times over the same period.

LMIRT also faces a refinancing wall in 2018, with S$100 million in medium term notes due in November and S$90 million of secured loans will come due in December.

"While the trust has demonstrated a track record of refinancing its debt maturities, it may not continue to do so, if market liquidity tightens unexpectedly," the credit rating agency said.

Moody's said its review will focus on LMIRT's ability to reduce its exposure to the Lippo group of companies; improve its financial metrics such that its debt to total deposited asset is well below 40 per cent to buffer foreign exchange rate fluctuations and asset devaluations; and address its 2018 debt maturities.

The trust has a portfolio of 21 retail malls and seven retail spaces across major cities in Indonesia, with a total appraised value of around S$1.9 billion.