December 2, 2016 / 7:40 AM / a year ago

Fitch Affirms Lippo Karawaci at 'BB-'/'A+(idn)'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, December 02 (Fitch) Fitch Ratings has affirmed Indonesia-based property developer PT Lippo Karawaci Tbk's (Lippo) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. Fitch Ratings Indonesia has also affirmed Lippo's National Long-Term Rating at 'A+(idn)' with a Stable Outlook. A full list of rating actions is given at the end of this commentary. The affirmation of Lippo's ratings reflects our view that the slowdown in its contracted sales in 2015 and 9M16 is mostly cyclical and we expect property sales to improve in 2017. Lippo's credit metrics continue to be in line with its rating despite the soft property sales. We expect the company to sell close to IDR3trn of property projects in 2016, driven by planned launches of new affordable housing projects and following sales of just IDR753bn in 9M16. We also expect Lippo to sell two assets - Lippo Kuta Mall and Lippo Plaza Jogja/Siloam Hospitals Yogyakarta - to its Singapore-listed REITs in the next three to six months. Should the company be unable to execute its near-term plans, Fitch may assess that its business profile has weakened, and may take negative rating action. Lippo's ratings also factor in its strong non-real estate development cash flows, which support the company's ability to meet its expenses when property sales are slow. Lippo's non-real estate development EBITDAR stem from its majority ownership of a leading domestic hospital network, PT Siloam International Hospitals Tbk (Siloam), as well as the retail malls that it owns or operates, its hospitality and infrastructure businesses, asset management, and dividends from two Singapore-listed REITs that it has sponsored. Non-real estate development EBITDAR in the 12 months to end-3Q16, excluding profits attributable to minority interests within the consolidated group, covered Lippo's consolidated interest expense and operating lease rent by 1.2x. '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 Manageable Leverage Despite Slow Sales: Lippo's leverage (net adjusted debt/adjusted inventory) stood at 42% at end-3Q16, which was below the 50% threshold at which Fitch would consider negative rating action. The company was able to cut its expansionary capex in 9M16 to conserve cash flows amid weak property sales. Part of its construction costs are also linked to property sales made during the current period. We consider this flexibility to be a key defensive attribute. Property Sales to Improve: Fitch expects demand for property to increase in 2017 because we forecast improvement in domestic economic activity and consumer sentiment. We believe the strong response to the government's tax amnesty implemented on 1 July 2016 will spur property demand as more undeclared wealth - especially domestically, but also from abroad - moves into the real sector. Lippo postponed all of its property launches in 2016 until after the tax amnesty was declared in a bid to benefit from the expected uptick in demand. Risks to Asset-Light Strategy: Lippo's strategy of recycling assets through its sponsored REITs is a key component of managing its capital structure. However, some asset sales to the REITs have been delayed due to regulatory considerations or protracted negotiations on pricing. Nevertheless, we expect Lippo to finalise the sale of Lippo Kuta Mall and Lippo Plaza Jogja/Siloam Hospitals Yogyakarta in the next three to six months; both the REITs have sufficient headroom on their balance sheets to purchase the earmarked assets. However Fitch estimates that the REITs' debt/assets ratios are likely to move towards 40% after these asset purchases, which is closer to the 45% regulatory debt/assets ceiling. Therefore we do not expect the REITs to continue to absorb assets from Lippo beyond 2017 unless they raise fresh unitholder funds or hybrid capital. In our rating case, we have therefore factored in delays in Lippo's asset sales to the REITs beyond 2017. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Lippo include: - Contracted sales of IDR3trn in 2016 and IDR4.5trn in 2017 - Lippo Mall Kuta to be sold to the REITs in 4Q16, and Lippo Plaza Jogja/Siloam Hospitals Yogyakarta to be sold in 1Q17 RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - A sustained increase in leverage to more than 50% (3Q16: 42%) - A sustained weakening to below 1.2x in the ratio of the sum of EBITDAR from non-real estate development activities and dividend income from REITs less profit attributable to minority interest to the sum of interest cost and operating lease rent (12 months to 3Q16: 1.2x) - Inability to pre-fund capex Positive: A rating upgrade is not expected in the medium term due to 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. FULL LIST OF RATING ACTIONS PT Lippo Karawaci Tbk 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-' National Long-Term Rating affirmed at 'A+(idn)'; Outlook Stable Theta Capital Pte Ltd Ratings on outstanding US dollar bonds guaranteed by Lippo and its subsidiaries affirmed at 'BB-' Contact: Primary Analyst Hasira De Silva, CFA (International Ratings) Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Primary Analyst Bernard Kie (National Ratings) Analyst +62 21 2988 6815 PT Fitch Ratings Indonesia DBS Bank Tower Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Secondary Analyst Bernard Kie (International Ratings) Analyst +62 21 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Summary of Financial Statement Adjustments - Fitch deducts the profits attributable to minority interests in calculating the ratio of non-real estate development cash flow coverage of Lippo's interest cost and operating lease rent. This is because key subsidiaries of Lippo that are listed do not pay significant dividends. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. 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