Fitch Assigns Lippo's USD260m Notes 'BB-' Final Rating
The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 5 August 2016.
The notes are rated at the same level as Lippo's senior unsecured rating, as they represent unconditional, unsecured and unsubordinated obligations of the company. The notes form a part of the same series as the existing USD150m 7% senior unsecured notes due in 2022, which are also rated 'BB-'. Lippo expects to use the proceeds to refinance its outstanding USD250m 7% senior unsecured notes, which are due in 2019.
KEY RATING DRIVERS
Slower Presales, Asset Sales: Lippo sold IDR328bn of residential property in 1Q16 - a sharp decline from IDR1.4trn in 1Q15. The company postponed launches in 1H16 until after the government's tax-amnesty ruling was passed. We now expect Lippo to sell around IDR3trn of residential property for 2016, which is about IDR1.5trn lower than our previous expectations. We still expect Lippo to inject IDR1.7trn of mature malls and hospitals to its Singapore-listed real estate investment trusts in 2016, although there has been some delay in this process as well.
Significant Flexibility on Capex: Lippo has significant flexibility to defer its capex during times of weak presales, which supports its ratings. The company has significantly curtailed its capex this year to around IDR3.3trn, which is less than half of its initial budget. This is because much of its capex included discretionary land banking and construction costs contingent on selling a minimum value of new projects. Fitch believes this will allow Lippo to conserve cash flows and manage leverage within its rating parameters in 2016.
Strong Recurring Cash Flows: Lippo owns a large portfolio of assets that generated recurring operating EBITDAR (before operating lease rents) of IDR1.9trn during the 12 months to end-March 2016 (LTM 1Q16). Over 60% of these recurring cash flows stem from one of Indonesia's largest private hospital networks, which Lippo owns, for which there is stable demand. The remainder comprises of one of the largest retail mall franchises in Indonesia, several hotels and educational institutions, and dividend income from its REITs. Recurring EBITDAR covered Lippo's consolidated interest and operating lease payments by 1.2x in LTM 1Q16, which underpins its ratings.
Limited Rating Headroom: Lippo's leverage stood at 45% at end-March 2016, lower than the 48% at end-2015, supported by cash collected on presales made in prior years, capex cuts, as well as a strengthening of the Indonesian rupiah. However, Lippo's leverage is close to the 50% threshold beyond which the ratings may be negatively affected.
Fitch's key assumptions within our rating case for the issuer include:
- residential presales of IDR3trn in 2016
- asset sales to REITs of IDR1.7trn in 2016
- capex of IDR3.3trn in 2016
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-a sustained increase in leverage to more than 50%
-a sustained weakening in the ratio of EBITDAR from recurring sources to interest cost and operating lease rent to below 1.2x
-inability to pre-fund capex.
Positive: A rating upgrade is not expected in the medium-term given Lippo's smaller operating scale and recurring income base compared with higher-rated international peers. We also expect Lippo's leverage to remain high over the medium-term as it executes its expansion plans.