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Arrest of Lippo Group executive leaves one of South-east Asia's biggest projects in limbo

[JAKARTA] The arrest of a senior executive at Lippo Group, one of Indonesia's leading business conglomerates, has thrown into doubt the future of a major development project touted as the "Shenzhen of Indonesia."

The nation's Corruption Eradication Commission, known as KPK, this week detained the Lippo director, along with another employee, two consultants and government officials from the Bekasi regency in West Java province in a bribery case related to development of the project. It is called Meikarta.

"Given all these headlines regarding permits issues, we are concerned about the sustainability of the Meikarta project, both from sales as well as funding concern," Trung Nguyen, a senior credit analyst at Lucror Analytics Pte, wrote in a report.

Mr Nguyen wrote that the credit bias for the group remains "negative" given the deterioration in its financial profile, as well as issues such as permits and the bribery case.

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The Meikarta bribery case may cause investors to become cautious as it follows KKR & Co.'s struggle to protect its investment in Indonesia's PT Tiga Pilar Sejahtera Food and Goldman Sachs Group's court battle with PT Hanson International. The arrests may bolster President Joko Widodo's image as being tough on corruption ahead of a presidential election scheduled for early next year.

This is the second time Lippo has become involved with the anti-corruption agency, which identified the director only as "BS." Local newspapers Bisnis Indonesia, Jakarta Post and Kompas identified him as Billy Sindoro. Sindoro was sentenced to three years in prison in 2009 for bribing Indonesia's antitrust agency, according to KPK.

TRAIN CORRIDOR

While the alleged bribe of 13 billion rupiah (S$1.18 million) is tiny compared with the millions in alleged illegal kickbacks in the national electronic identity card contract program in 2010 and the bailout of PT Bank Century in 2008, it highlights the difficulties that companies face in navigating the approval system for projects in Indonesia.

The planned 278 trillion-rupiah development, covering 22 square kilometers of the Bekasi-Cikarang district on the outskirts of Jakarta, is the largest undertaking in Lippo's 68-year history. It would provide access to what would be the first high-speed train in South-east Asia and gardens modeled on Manhattan's Central Park. The group has said the project will be jointly funded by partners such as Mitsubishi Corp, Toyota Motor Corp and Sanko Soflan Holdings.

The project, developed by PT Lippo Cikarang's unit PT Mahkota Sentosa Utama, has already completed residential towers and pre-sold thousands of units.

‘SHOCKED'

Danang Kemayan Jati, head of corporate communication of Lippo Karawaci, did not answer phone calls from Bloomberg News or respond to text messages seeking comment on Wednesday. Lippo Group executive director John Riady and his father, deputy chairman James Riady, didn't respond to calls and messages. Mahkota Sentosa Utama is "shocked" by the arrests and will conduct internal investigations, according to a statement by its lawyer, Denny Indrayana.

Lippo Group was founded by James' father, Indonesian tycoon Mochtar Riady, and has interests in property, health care, education, retail, television and financial services in Indonesia, Singapore and Hong Kong. PT Matahari Department Store, supermarket operator PT Matahari Putra Prima, PT Siloam International Hospitals and Internet and cable TV provider PT First Media are among the listed companies controlled by the group.

Shares of Lippo Cikarang are down 18 per cent this week. Its parent PT Lippo Karawaci lost 3.4 per cent and its dollar bonds traded near record lows. S&P Global Ratings said Wednesday the bribery case may weaken Lippo Karawaci's liquidity which, along with cash flow, will be a key credit factor over the next 12 months.

THIN BUFFER

Lippo Karawaci's liquidity buffer is thin and any adverse effects of the bribery case on the progress and cash flows of its largest property development project could further increase pressure, S&P said. While asset sales will provide interim liquidity relief, cash and funds from asset disposal might be enough to meet the debt-servicing needs only for the next year, it said.

Lippo Karawaci and Lippo Cikarang failed to file first-half results by a July 31 deadline that was extended to Oct 1.

"Lippo has no other ongoing property development besides Meikarta," Maybank Kim Eng analyst Aurellia Setiabudi wrote in research note Tuesday. "We expect a sizable negative impact towards its property pre-sales from these uncertainties on the development permit."

Lippo's Meikarta township, located along the high-speed train network connecting Jakarta and Bandung, the capital of West Java province, is among the largest projects being built in the region. The project will be close to industrial parks and factories of global carmakers such as Toyota Motor and Honda Motor Co.

SPENDING SLOWDOWN

Other parts of Lippo's business have been hurt by a slowdown in household spending. Net income of Matahari Department Store fell 5.6 per cent last year, the first decline since at least 2010. Matahari Putra Prima, the supermarket business, reported a 1.2 trillion rupiah net loss, the first ever since Bloomberg started compiling the data in 1991.

Lippo may overcome the current crisis as several Indonesian property companies, which ran into trouble in early phase of their projects, have emerged relatively unscathed, according to Jemmy Paul, president director at Jakarta-based PT Sucorinvest Asset Management.

"The only difference this time around is the scale of Meikarta project itself," Mr Paul said. "I think Lippo should focus on keeping this project alive, salvage whatever sales that they have secured and deliver them. This is not something that they can unwind midway."

BLOOMBERG