On June 22, Moody's Investors Service announced that it downgraded Lippo Malls Indonesia Retail Trust's (LMIRT) corporate family rating to B2 from B1. Moody's has also downgraded the backed (guaranteed) senior unsecured rating on the bonds to B2 from B1. The outlook for all the ratings remains negative.
"The downgrade reflects our expectations that LMIRT's credit metrics will remain weak despite improving operating environment in Indonesia as restrictions ease. Rising interest rates also heighten risks that the trust's interest coverage will further weaken given its high proportion of floating-rate debt," says Rachel Chua, a Moody's Vice President and Senior Analyst.
"The downgrade also reflects the trust's weakening financial policy as demonstrated by its increasing proportion of floating-rate debt over the past three years, as well as the limited headroom under its regulatory leverage ratio to accommodate a decline in asset value," says Chua, who is also Moody's Lead Analyst for LMIRT.
LMIRT's interest coverage ratio (ICR) will likely stay weak at 1.5x-1.6x through 2023 and will worsen if interest rates spike, Moody's estimates. The Monetary Authority of SIngapore has a guideline of ICR at 2.5x as a minimum level for REITs with aggregate leverage of more than 45%. As of March 31, 2022, LMIRT's aggregate leverage stood at 42.9%, a whisker away from the regulatory 45% while ICR was 2x. Moreover, only 42.5% of the trust's debt are fixed rate. Floating rate debt is a risk for REITs as floating rates are prone to the US Federal Reserve's interest rate hike cycle, thus pressuring distributions per unit. As it is, LMIRT's cost of debt as at end-March was 6.65% including perpetual securities.
Moody's also estimates LMIRT's adjusted leverage as measured by adjusted net debt/EBITDA will improve but remain weak at 8.0x-8.5x over the next 12-18 months as its occupancy rate increases towards 81% in 2022 and 83% in 2023, from 79% at March 31 this year.
LMIRT's B2 ratings reflect the trust's established presence in Indonesia, with its portfolio spread across 12 Indonesian cities that have large catchment populations, targeting the country's growing middle- to upper middle-income consumers. The rating also incorporates the trust's degree of independence as a publicly listed and regulated trust in Singapore, despite the linkages between LMIRT and its sponsor, Lippo Karawaci Tbk, Moody's says.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
The negative outlook reflects LMIRT's heightened refinancing risk in a tight funding market given its $135 million term loan maturities through 2023 and its US$250 million bond maturing in June 2024, Moody's points out.
LMIRT had cash and cash equivalents of $113 million as at end-March, an undrawn and committed line of $23 million and annual operating cash flows of around $50 million, which should cover its capital requirements and the $67.5 million term loan maturing in November this year.
