OREANDA-NEWS.Fitch Ratings has affirmed PT Lippo Karawaci Tbk's (Lippo) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB-' with Stable Outlook. The agency has also affirmed Lippo's senior unsecured rating and outstanding notes issued by Theta Capital at 'BB-' and its National Long-Term Rating at 'A+(idn)' with Stable Outlook.

Lippo's rating reflects its strong market position and demonstrated track record in the property development and investment property businesses, the adequate coverage provided by the recurring EBITDA generated by its retail, healthcare, hospitality and fee-based income business of interest and lease rental expenditures, comfortable liquidity and low refinancing risk due to its well spread out debt maturity profile. The Stable Outlook reflects the stable outlook in Indonesia for the key real estate sub-markets Lippo operates in - residential, healthcare, retail and hospitality.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Property Development Strategy Modified: Lippo has successfully changed its property development strategy to focus on condominiums, mid-market properties, and property development in suburbs and Tier 2 cities. In 2014, marketing sales revenue rose to IDR5.2trn from IDR4.1trn in 2013, with condominiums accounting for 52% (2013: 25%), followed by townships with 41% (2013: 58%) and offices with 7% (2013:16%).

Robust Marketing Sales: The change in the property development strategy in response to market conditions and buyers' preferences drove the 26% increase in its property marketing sales. Lippo's sales to the two REITs it has sponsored, First REIT (FREIT) and Lippo Malls Indonesia Retail Trust (LMIRT), more than doubled to IDR3.3trn in 2014 (2013: IDR1.5trn), which has strengthened the company's liquidity and will allow it to finance its 2015 capital expenditure without tapping additional debt. Lippo's consolidated unrestricted cash balance increased to IDR3,529bn as of end-2014 from IDR1,855bn in end-2013.

Stable Recurring Businesses: Lippo's portfolio of businesses that generate recurring revenues - retail malls, healthcare, hotels and hospitality, and fee-based business - recorded robust revenue growth of 28% to IDR4.7trn in 2014. EBITDA margin from these businesses was also maintained at 21.37% in 2014 (2013:20.47%). These businesses are more stable than the cyclical property development business and generate adequate cash flows for Lippo to meet its fixed finance costs, that is, interest and lease rental expenses.

Asset Disposal Funded Capex: Lippo has proposed to sell its stable retail and healthcare assets to FREIT and LMIRT, and use the proceeds to fund its capex. This strategy, if implemented successfully, would result in the development property leverage, as measured by the ratio of net debt to net inventory, declining, and Lippo's gross debt remaining below the end-2014 level of IDR10trn till end-2017. Lippo's capex is scalable and the company has the flexibility to limit capex to the amount of cash raised from asset sales to FREIT and LMIRT.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Property marketing sales will increase by 16% to IDR6,000bn in 2015 and growth in Indonesian rupiah terms will be sustained till end-2017
- EBITDA margin to remain steady at over 30%
- Asset sales to FREIT and LMIRT to be significantly lower in 2015 (2014: IDR3.3trn)
- Starting 2015, Lippo will fund its capex through asset sales and accumulated cash balance. Hence gross debt will not exceed the end-2014 level of IDR10trn till end-2017.

RATINGS SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to sustain development property leverage (net debt/net inventory) at below 30% due to a prolonged weakness in property demand, while assuming the investment property fixed charge cover remains at 1.75x.
- Inability to pre-fund capex

Positive rating action is not anticipated due to the geographical concentration of Lippo's businesses in Indonesia and the company's smaller scale in relation to international peers.

The full list of rating actions is as follows:
Long-Term Foreign Currency IDR affirmed at 'BB-'; Outlook Stable
Long-Term Local Currency IDR affirmed at 'BB-'; Outlook Stable
Senior unsecured rating affirmed at 'BB-'
USD250m senior unsecured notes due in 2019 issued by Theta Capital affirmed at 'BB-'
USD403m senior unsecured notes due in 2020 issued by Theta Capital affirmed at 'BB-'
USD150m senior unsecured notes due in 2022 issued by Theta Capital affirmed at 'BB-'
National Long-Term Rating affirmed at 'A+(idn)'; Outlook Stable