Khairani Afifi Noordin Thu, Jul 07, 2022
Fitch Ratings has downgraded Lippo Malls Indonesia Retail Trust’s (LMIRT) Long-Term Issuer Default Rating (IDR) to ‘B’, from ‘B+’ with stable outlook.
The agency has also downgraded the rating on LMIRT’s senior unsecured notes due 2024 and 2026 to ‘B’, from ‘B+’; with the Recovery Rating remaining at ‘RR4’. The notes are issued by its wholly owned subsidiary, LMIRT Capital.
The downgrade reflects Fitch’s expectation that LMIRT’s funds from operation fixed-charge cover will fall to around 1.0x-1.1x in the next 12-18 months, which will no longer be commensurate with a higher rating.
A slow recovery in the trust’s operating cash flow and high exposure to rising interest rates underpins our forecast, it said in a statement.
The stable outlook reflects Fitch’s view that the drop in LMIRT’s operating cash flow has bottomed out as Indonesia moves towards living with Covid-19. “We further expect the trust to be able to manage its liquidity in the next few years, supported by adequate access to credit markets and the gradual improvement in cash flow,” it said.
LMIRT is working on redeveloping some malls to improve their appeal with work scheduled to continue throughout 2023-2024. Fitch expects occupancy to stabilise — but remain below pre-pandemic levels of over 90% till 2024 — and have tightened the positive rating sensitivities to reflect this.
Net property income (NPI) excluding guaranteed NPI on Puri Mall of around $32 million is expected to reach $97 million in 2022 and $110 million in 2023 as the easing of pandemic-related movement restrictions has reduced the need to provide rent rebates to tenants. Fitch has factored in rebates of 5% for the rest of 2022 and no rebates in 2023 as it does not expect major mobility restrictions.
The rising interest rates is expected to increase LMIRT’s interest payments to $58 million in 2022 and $65 million in 2023, from $55 million in 2021. Fitch noted that 57.5% of LMIRT’s outstanding borrowings are on floating rates, which have risen by more than 100 basis points in 1HFY2022.
“In a stressed scenario, LMIRT can opt not to pay the perpetual coupons on a non-cumulative basis as per the terms and conditions of the securities. This would provide the trust with headroom to manage its cash flows,” it said.
LMIRT expects to increase the proportion of fixed-rate debt towards its long-term policy of 75%, in tandem with refinancing its term loans due in November 2022 and November 2023. As a result, Fitch expects floating-rate debt to stay above 50% of total debt for the next 18 months.
The agency assumes that LMIRT will not call its $120 million subordinated perpetual securities at the first call date on December 19, 2022, given weak market sentiment. This means the coupon rate on the instrument should reset to the prevailing five-year swap offer rate plus 4.755%.
Fitch therefore forecast LMIRT’s annual perpetual coupon payments to rise to $20 million in 2023, from $17 million in 2022.