Moody’s downgrades Lippo Malls Indonesia Retail Trust’s rating on weak financials

MOODY’S Investors Service has downgraded the corporate family rating of Lippo Malls Indonesia Retail Trust (LMIRT) from B1 to B2, it said on Wednesday (Jun 22).

The backed senior unsecured rating for bonds issued by LMIRT’s wholly-owned subsidiary, LMIRT Capital, was also downgraded from B1 to B2. The bonds are guaranteed by the trustee of LMIRT.

Moody’s maintains its negative outlook on all ratings.

The downgrade reflects expectations that “LMIRT’s credit metrics will remain weak”, said Rachel Chua, a Moody’s vice-president and senior analyst.

The trust’s interest coverage is expected to stay weak at 1.5 times to 1.6 times through 2023, said Chua, the lead analyst for LMIRT at Moody’s. It will worsen with rising interest rates, given its high proportion of floating-rate debt, which has been increasing in proportion over the past 3 years, she added.

As at Mar 31, 2022, only 42.5 per cent of LMIRT’s debt was fixed-rate.

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LMIRT also faces heightened refinancing risk in a tight funding market, impeded by an uncertain rate of Covid-19 recovery in an environment of inflation and slower growth.

With cash and cash equivalents of S$113 million, an undrawn and committed line of S$23 million and annual operating cash flows of around S$50 million as at Mar 31, 2022, its liquidity is “adequate”. This will “more than sufficiently address” its capital requirements and the S$67.5 million term loan maturing in November 2022.

However, Moody’s expects that the trust will need to draw on external funding to address its S$135 million term-loan maturities through 2023, and its US$250 million bond maturing in June 2024. 

Moody’s also estimates that the trust’s adjusted leverage will improve to around 8 to 8.5 times Ebitda (earnings before interest, taxes, depreciation and amortisation) over the next 12 to 18 months as occupancy rate increases, but will remain weak.

As at Mar 31, 2022, debt/deposited asset ratio of 42.9 per cent was almost at the regulatory limit of 45 per cent, Moody’s said. A weakening of the Indonesian rupiah against the Singapore dollar will expose LMIRT to a decline in asset value.

Moody’s said that the trust’s established presence and portfolio in Indonesia and its degree of independence in Singapore from the Lippo group of companies inform its B2 ratings.

Regulatory oversight from Singapore’s monetary authority, exercised through the company’s board mostly comprising independent directors, partially tempers governance risk stemming from related-party transactions.

However, Moody’s noted that an upgrade in the next 12 to 18 months is unlikely, considering the negative outlook.

Instead, the trust’s ratings could be downgraded if its operating environment worsens, if it fails to secure financing for its debts, if it increases its exposure to the Lippo group of companies or if the credit quality of the Lippo group of companies worsens.