SINGAPORE (Nov 20): Indonesian property developer Lippo Karawaci has expressed regret over a credit downgrade by Fitch Ratings, saying its IDR 6 trillion ($564 million) divestment plan to strengthen capital was progressing smoothly.
The global credit rating agency on Friday downgraded Lippo Karawaci's long-term foreign and local currency issuer default ratings by two notches as well as subsidiary Theta Capital's USD bonds to CCC+ from B, citing liquidity risks as a result of uncertainty over asset sales, on which Lippo has been increasingly reliant to service debt obligations.
The ratings agency added that uncertainty had been worsened by bribery allegations surrounding its Meikarta flagship development in Cikarang, West Java, a US$21 billion ($29 billion) urban project outside Jakarta developed by Lippo subsidiary Mahkota Sentosa Utama.
Indonesia's anti-graft officials last month arrested four people affiliated with Lippo Group, including director for operations Billy Sindoro, for allegedly bribing officials at Bekasi regency in West Java, to smooth permit processing.
See: Arrests leave one of Southeast Asia's biggest projects in limbo
See also: Indonesia arrests nine in bribery probe linked to $29 bil Lippo Group project
They also raided the homes of Lippo Group CEO James Riady, son of Lippo founder Mochtar Riady, and questioned him as a witness. Lippo and Riady have denied any wrongdoing.
"Lippo's credit profile could weaken further if this [the Meikarta case] results in a large financial liability," Fitch said.
In response, Lippo Karawaci said in a Monday statement, “We regret Fitch Ratings' decision to lower our credit ratings, as the decision was unsubstantiated. With the completion of the first phase of our larger divestment plan, we are now in a well-positioned stance, which shows from our cash flow and balance sheet, and we are on track for our next-stage growth.”
"While execution risks remain, we believe the quality of assets make completion a high certainty even amid current volatility," the company said, "[Lippo Karawaci] would be well positioned to meet its liquidity needs, and capitalise on compelling opportunities unique to current market volatility."
Lippo Karawaci has been downgraded by Moody's three times in the past 18 months on mounting concerns over the property group's financial robustness.
The developer acknowledged Fitch's concerns over its cash flow and liquidity risks, but said it had completed the divestment of assets -- a10.6% stake in First REIT and its manager Bowspirit Capital Corporation -- to two of its Singapore-based affiliates.-- OUE and OUE Lippo Healthcare -- for IDR 2.17 trillion in cash.
First REIT is the first listed healthcare REIT on the Singapore Exchange and has a portfolio of 20 healthcare-related propertiesin Indonesia, Singapore and South Korea.
On Monday, units in First REIT, sponsored by Lippo Karawaci which is also its key tenant and main revenue contributor, fell more than 7% while Lippo Malls Indonesia Retail, which also has the same sponsor, declined more than 4%.
The company also expects to raise more than IDR 6 trillion from the upcoming sale of Lippo Mall Puri in West Jakarta; divestment of its remaining stake in First REIT, the Singapore listed healthcare real estate investment trust; and the sale of its stake in a hospital in Myanmar.
According to the Jakarta Globe, Lippo Karawaci’s US$75 million unsecured bond will be due by June 2020, followed by a US$410 million bond that will mature in 2022 and a remaining US$425 million bond that will mature in 2026.
The company said the asset divestments will “give IDR 14 trillion in debt versus IDR 53 trillion in assets at acquisition value, and 20% to 30% higher if revalued to reflect current market prices”.
However, Fitch said its latest downgrades follow "significant weakening" of Lippo Karawaci's property-development cash flow, owing to "sustained poor demand" for the company's products due to its focus on mid- to high-end customers, as well as weak execution of some projects that "could diminish the strength of Lippo's brand.”
It also noted that Lippo plans to sell its non-core assets to meet operating cash flow and interest payments over the next few years is “subject to significant uncertainty and market risk that is beyond management's control”.
