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Fitch downgrades LMIRT to BB- on prolonged weak financial metrics

FITCH Ratings has downgraded Lippo Malls Indonesia Retail Trust's (LMIRT) long-term issuer default rating to BB- from BB previously, with a negative outlook.

The downgrade to BB- reflects the rating agency's expectation that LMIRT's financial metrics will remain weak for a prolonged period, as a recovery in Indonesia's retail sector is taking longer than Fitch estimated, it said in a report on Wednesday.

The negative outlook captures the uncertainty around the duration of the pandemic and the implications for the economy and purchasing power, which are risks to Fitch's forecasts, it said.

Fitch's downgrade comes as LMIRT's third-quarter results show continued weak retail operations, even after the Indonesia government eased strict nationwide Covid-19-related movement restrictions imposed in Q2.

The rating agency expects LMIRT's revenue and earnings before interest, taxes, depreciation and amortisation to be around 25 per cent lower in 2021 than previously estimated due to continued weak consumer sentiment in Q3 and the risks of new movement restrictions which delay recovery.

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Fitch has also downgraded LMIRT's US$250 million senior unsecured notes due 2024 to BB- from BB.

Fitch rates LMIRT on a standalone basis as the latter is sufficiently ring-fenced from sponsor Lippo Karawaci, which owns about 32.3 per cent of LMIRT's equity and controls its manager.

While LMIRT has a right of first refusal over Lippo's malls and bought a large portion of its malls from its sponsor, as a Singapore-listed Reit, it is subject to stringent regulations that require two independent valuations and minority unitholder approval for related-party transactions, the report noted.

"We think these rules adequately mitigate the risks such transactions pose to minority unitholders," Fitch said.

LMIRT units were trading down 1.2 per cent or 0.1 Singapore cent to 8.3 cents as at 9.57am on Thursday.

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