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Lippo Karawaci: S&P places CCC+ rating on review with 'positive implications'; Moody's affirms B3 rating

STANDARD & Poor's (S&P) could raise its rating on real estate developer PT Lippo Karawaci by “one or two notches” on expected improvement in liquidity after the company completes a proposed rights issue, the rating firm said on Thursday.

S&P placed the Riady family-backed company's CCC+ long-term issuer credit rating on review "with positive implications". The credit rating and outlook are similar for Lippo Karawaci's outstanding guaranteed senior unsecured notes.

The company’s proposed rights issue of US$730 million would "significantly improve" the company's liquidity and help reduce debt, S&P said. It will also ensure there are enough funds to cover rental and interest expenses until December 2020. Lippo Karawaci is the sponsor for Singapore-listed First Reit and Lippo Malls Indonesia Retail Trust.

Moody's Investors Service has also changed Lippo Karawaci’s outlook to "stable" from "negative", on the back of improved liquidity from its rights issue. It affirmed the company's B3 corporate family rating, which also applies to senior-unsecured bonds issued by Lippo Karawaci wholly owned subsidiary Theta Capital. The bonds are guaranteed by Lippo Karawaci and some of its subsidiaries.

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S&P said that it would be reviewing, within the next 90 days, the impact of Lippo Karawaci’s proposed business plan and long-term strategy and financial policy.

S&P said the company’s US$150 million debt reduction plan was “opportunistic” as it does not believe the failure of the offer will result in a payment default. Done through a proposed tender offer for its outstanding senior unsecured bonds, S&P added that it does not constitute a distressed exchange.

"This is because the bonds are not due for the next three to four years and Lippo will have adequate liquidity for at least the next two years. Therefore, the company will not face any financial distress even if the tender offer fails," it added.

This is further supported by the company’s planned sale of Lippo Mall Puri in the second half of the year, which will bolster its financial and liquidity, creating an estimate net inflow of US$200 million, S&P said. Added investment into existing projects and the Meikarta township would also provide future cash flows, which could also be improved by the launch of Value Homes in Lippo Village by 2020.

Moody’s said Lippo Karawaci’s B3 corporate family rating reflects a reliance on asset sales and external funding, stemming from “weakness in its core property development business”. This is because the company had not launched a new project since 2016 at the holding company level.

"Lippo Karawaci's ratings are unlikely to be upgraded as long as the company's ability to service its debt is contingent upon its ability to execute assets sales," the statement said. Positive momentum, however, could build if the company improves its core property development business, as successful project launches result in higher operating cash flows.

That being said, Moody’s ratings could still be downgraded if operating cash flow deteriorates at a holding company level, and if there are signs of cash leaking from Lippo Karawaci to fund affiliated companies. Examples include inter-company loans, aggressive cash dividends, or investments in affiliates. The company’s senior unsecured bond rating could also face downgrade if its subsidiaries incur debt.

Jacintha Poh, a Moody's vice-president and senior credit officer, said: "The underwritten rights issue demonstrates the strong commitment from the Riady family to support Lippo Karawaci's effort to reduce debt and complete existing projects under construction." 

The rating firm added that risk surrounding Lippo Karawaci will be lightened as there would be funds set aside to repay debts maturing in 2019 and 2020.

As for investment into existing key projects, Moody’s said it does not expect these projects to contribute significant cash flows until 2020 as sales will “remain lacklustre” in 2019 from weak market sentiment. Assuming there are no new project launches, Lippo Karawaci is expected to generate negative operating cash flows of around 3.5 trillion rupiah (S$331.7 million) in 2019 and around three trillion rupiah in 2020 at the holding company level, which can be met from proceeds of its rights issue and asset divestments.

Moody’s is expecting operating cash flows to “remain negative” over the next three to five years as the company’s Meikarta project is still in its growth phase. The project has also been deemed “credit negative” as it limits the holding company’s ability to access funds in its entirety from its partial ownership of the project.