Fitch downgrades outlook, ratings for LMIRT on refinancing risk

FITCH Ratings on Monday (Nov 28) downgraded Lippo Malls Indonesia Retail Trust’s (LMIRT) issuer default rating to “B-” from “B” previously. The Singapore-listed trust’s outlook has also been revised downwards to negative from stable previously. 

In a note,  Fitch Ratings analysts attributed LMIRT’s downgrade to “rising refinancing risk”. They noted that two-thirds of the trust’s debt, including US$250 million of senior unsecured notes, will mature in the next 18-20 months. The trust will need external financing for these obligations, they said. 

Although LMIRT demonstrated an ability to “tap banks and capital markets” even during the worst of the Covid-19 pandemic, the analysts said execution risks have “increased significantly” as capital market conditions have turned unfavourable. 

LMIRT has a S$135 million bank loan due in November next year. Analysts believe it will be able to refinance this loan in the next six months as LMIRT’s “access to bank markets is sufficient”. 

However, refinancing risks for notes due in 2024 – namely a US$250 million medium-term note due in June that year – has increased. 

“Slowing global growth, rising inflation and higher interest rates have weakened investor sentiment for emerging-market debt,” said the analysts. 

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Fitch Ratings is also expecting LMIRT’s funds from operation (FFO) fixed-charge cover, which includes the coupons on its perpetual securities, to fall in the next 12-18 months on the back of the trust’s high exposure to rising interest rates. 

The recovery of the trust’s operating cashflows may also be “pressured further” if the Indonesian rupiah continues to depreciate, analysts warned. 

Looking ahead, LMIRT will also face a “slow operational recovery”, analysts noted. While net property income for 2022 and 2023 are expected to hit S$131 million and S$137 million respectively due to a gradual improvement in occupancy rate to 81 per cent for the current year and 84 per cent in 2023, occupancy levels are expected to remain below the pre-pandemic levels of over 90 per cent for the next two years. 

“This is mainly due to structural weakening in occupancy post-pandemic in several malls and redevelopment activities in two malls. We have also assumed that stronger rents from the reduction of rent rebates to tenants will be partly offset by rupiah depreciation,” said the analysts. 

In terms of leverage, LMIRT’s regulatory leverage ratio – calculated in terms of debt over total assets – rose to 43.7 per cent as at Sep 30 from 42.5 per cent in end-2021, which leaves the trust “little room” under the regulatory ceiling of 45 per cent, analysts observed. 

They expect that LMIRT’s leverage ratio will exceed 45 per cent in the next 12 months as the portfolio’s value may be pressured by further weakening of the rupiah, or a decline in the value of malls with land titles under the build, operate, transfer scheme. 

In a regulatory filing on Monday, LMIRT’s manager made reference to Fitch Ratings’ report and said the trust “remains in compliance with its financial covenants and the aggregate leverage limit”. 

Units of LMIRT ended Monday at S$0.03, up 3.5 per cent or S$0.001.