Lippo Karawaci's outlook downgraded to negative by S&P

Lippo announced the sale of assets comprising malls and hospitals to two trusts - LIMR and First Reit, which owns the Siloam Hospitals Purwakarta (left) in West Java. But the sale has been hit by delays. However, S&P maintained its BB- long-term corp
Lippo announced the sale of assets comprising malls and hospitals to two trusts - LIMR and First Reit, which owns the Siloam Hospitals Purwakarta (left) in West Java. But the sale has been hit by delays. However, S&P maintained its BB- long-term corporate credit rating on Lippo, as well as its BB- long-term issue ratings of its outstanding notes.PHOTO: FIRST REIT

Delays in selling assets to two Reits threaten cash flow: Agency

An Indonesian developer that sponsors two property real estate investment trusts (Reit) had its outlook downgraded to negative by a ratings agency yesterday.

Standard & Poor's Ratings Services said delays by Lippo Karawaci in selling assets to Lippo Malls Indonesia Retail Trust (LMIR Trust) and First Reit have weakened its prospective cash flow.

However, S&P maintained its BB- long-term corporate credit rating on Lippo Karawaci, as well as its BB- long-term issue ratings of its outstanding notes.

"We believe the company remains committed to further growth, especially in its healthcare segments," said S&P.

"This may require further external funding through 2016 and raising debt."

Lippo Karawaci had announced the sale of two malls, worth about 5.5 trillion rupiah (S$570 million) in total, to one of the Reits - LMIR Trust. This would have provided a cash flow of 1.5 trillion rupiah to Lippo in the 2015 financial year and a further two trillion rupiah annually in 2016 and 2017.

But S&P noted that Lippo Karawaci has signed only a conditional sale and purchase agreement for one of the malls, while the other is still being built.

"While we are confident that the company will close both sales in 2016, asset sales we earlier anticipated for 2016, which had higher margins, could be postponed by another year to 2017," said the agency.

A recovery in Lippo Karawaci's cash flow adequacy and leverage ratios will hinge on the company's ability to continue disposing of assets to the Reits beyond 2016, said S&P.

But the ratings agency is unsure if the Reits can raise sufficient funds to acquire these assets next year, given the subdued regional growth, slowdown in China and investors' attitude towards companies exposed to to emerging markets with volatile currency fluctuations such as Indonesia.

S&P also noted that the maximum leverage at Singapore-listed Reits was set at 45 per cent with effect from Jan 1. This will constrain the debt-raising capacity of both Reits and, in turn, the quantity of assets that they can buy from Lippo Karawaci using only debt.

"We could revise the outlook on Lippo (Karawaci) to stable if the company can execute its asset disposal plan in a timely manner," it said. "A revision of the outlook to stable would also be contingent on a stronger commitment to a prudent financial policy, supported by viable capital expenditure plans."

A version of this article appeared in the print edition of The Straits Times on January 14, 2016, with the headline 'Lippo Karawaci's outlook downgraded to negative by S&P'. Print Edition | Subscribe