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April 11 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Indonesia-based property developer PT Lippo Karawaci Tbk’s (Lippo, BB-/ Stable) USD150m 7% notes due 2022 a final ‘BB-’ rating. The new notes are issued by Theta Capital Pte. Ltd. and guaranteed by Lippo and certain of its subsidiaries. The notes are rated at the same level as Lippo’s senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The rating action follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 2 April 2014.
Support from Investment Property Portfolio: Lippo’s high-quality and expanding investment property portfolio, which comprises 16 hospitals and more than 30 retails malls under management, generates strong and stable recurring cash flow, which support its ratings.
In Lippo’s business model, the expansion of its investment portfolio will be funded by net sales proceeds of its development portfolio. Given that both cash and debts are fungible across investment properties and its development properties business, Fitch has made several assumptions in Lippo’s ratio calculations.
As Lippo is growing its investment portfolio, it needs to maintain sufficient fixed charge cover (recurring EBITDAR/ cash interest and rents) of 1.75x. The 1.75x ratio takes into account the fact that Lippo generates the majority of its investment property income from its hospital assets. Total debt is proportionately allocated to the investment property business based on this fixed charge cover ratio, with the rest allocated to the development property business.
Shifting Focus for Cash Flows: In 2014, Lippo plans to launch more developments aimed at the middle-class and shift development projects to suburbs or second-tier cities. Year-to-date 2014 marketing sales, mainly driven by Lippo’s new middle-class projects in Bintaro (on the outskirts of Jakarta, West Java), and St Moritz Makassar (South Sulawesi) totalled more than IDR 500bn. Of the total units launched at these two projects, the company had a presales rate of about 80%, which is positive considering the short-term headwinds in the Indonesian residential sector.
Proven Track Record, Project Diversification: Lippo is one of the largest property developers in Indonesia with an established track record and diversified project portfolio. We believe the company’s strong brand and flexibility in changing its product mix as well as its diversified project locations enable it to manage through property cycles while maintaining a strong balance sheet. This is evidenced by successful new project launches since mid-2013, despite softening property demand, especially for upscale products. During the period, Lippo managed to book about IDR2,323bn (USD200m) in marketing sales, while other developers chose to postpone launches.
Diversified Funding Access: Lippo’s rating also reflects its ability to tap various long-term funding sources, particularly to support cash flows during a downturn. It has an established track record in onshore or offshore borrowing, as well as in the domestic equity market. It recently raised about USD75m by privately placing around a 7% stake in the Siloam chain of hospitals. Lippo remains a majority shareholder in Siloam. Lippo’s access to affiliates Lippo Malls Indonesia Retail Trust (LMIRT) and First REIT to recycle commercial assets are also an important cash flow source. In 2013 Lippo sold two hospitals to First REIT for SGD140.4m.
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% (2014F: 21%) due to a prolonged weakness in property demand, while assuming the fixed charge cover remains at 1.75x.
- Inability to pre-fund capex
Positive rating action is not anticipated over the next 24 months due to the cyclical nature of development property sales and Lippo’s debt-funded capex.