LMIRT downgraded to Caa3 by Moody’s

RATINGS agency Moody’s Investors Service has downgraded Lippo Malls Indonesia Retail Trust : D5IU 0%’s (LMIRT) corporate family rating to Caa3 from Caa1.

The backed senior unsecured rating on LMIRT’s bonds has also been downgraded to Ca from Caa1.

Moody’s is maintaining the negative outlook on all ratings, it said on Monday (Jan 29).

The downgrade follows LMIRT’s tender offer of its outstanding 7.25 per cent senior notes due in 2024 and 7.5 per cent senior notes due in 2026. The trust bought back US$49.8 million of its 2024 notes and US$28.4 million of its 2026 notes, with US$138.4 million of its 2024 notes and US$114.7 million of its 2026 notes outstanding.

The transaction was funded by the remaining US$90 million of its 10-year secured bank loan of 2.5 trillion Rupiah (S$211.8 million) obtained last year. The deal is viewed as a distressed exchange by Moody’s, which is a form of default under its definition.

“Given the looming maturity in June 2024, the transaction was clearly intended to partly help the trust avoid a default,” said Rachel Chua, vice-president and senior analyst at Moody’s.

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The refinancing risk of LMIRT remains imminent even after the tender offer, with no committed funding plans in place, resulting in the downgrade to Caa3. Even if plans pan out for the 2024 bonds, which are likely to be secured in nature, Moody’s noted that it is unclear how the trust will manage the 2026 notes, given that its three largest assets have been pledged.

The credit metrics of LMIRT will remain under pressure for the next couple of years due in part to lower occupancy rates, with portfolio occupancy at 76.8 per cent as at Sep 30, 2023. Moody’s believes that recovery will be slow and gradual.

The interest cover for LMIRT, measured by adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) over interest, will remain weak at 2.2 times for the next two years. Adjusted leverage, measured by adjusted debt over Ebitda, is forecast to be around 7.5 times in the same period.

The Caa3 rating reflects the weak capital structure of LMIRT, which is burdened by its large borrowing base, weak financial management and uncertainty over its pace of recovery from the pandemic owing to inflation and slower growth.

The Ca rating on the notes issued by LMIRT is due to the risk of being lower on the priority scale as Moody’s expects secured debt to account for the majority of borrowings in the future.

The trust’s liquidity is weak with cash and cash equivalents of just S$99 million as at Sep 30 2022, coupled with operation cash flows of about S$40 million. This is not enough to address the repayment of its remaining US dollar bond and loan repayments in 2024. External funding is likely required to address cash flow needs.

The negative outlook is reflective of LMIRT’s persistently weak liquidity, funding requirements for the remainder of its 2024 bonds, as well as ongoing operational challenges.

Moody’s is unlikely to upgrade LMIRT’s ratings or revise the outlook prior to the trust substantially improving its liquidity and meeting its refinancing needs over the next 12 to 18 months. The trust will also need to establish a sustainable capital structure.

There is a possibility that LMIRT’s ratings could be downgraded further if the risk of default becomes materially higher.

Units of LMIRT closed flat at S$0.016 on Monday.