Singapore, April 02, 2014 -- Moody's Investors Service has affirmed the Ba3 corporate family rating of PT Lippo Karawaci Tbk and affirmed the Ba3 senior unsecured rating of bonds issued by Theta Capital Pte Ltd, a wholly owned subsidiary of Lippo Karawaci.
Moody's has also assigned a (P)Ba3 rating to the proposed USD senior unsecured notes to be issued by Theta Capital Pte Ltd and guaranteed by Lippo Karawaci and some of its subsidiaries.
The ratings outlook is stable.
The provisional status of the senior unsecured bond rating will be removed upon completion of the bond issuance with all satisfactory terms and conditions met.
RATINGS RATIONALE
Lippo Karawaci announced its proposed bond issuance on 2 April 2014, intending to raise up to USD150 million, largely to fund the development of new retail malls and hospitals, and for working capital requirements and general corporate purposes.
"If the planned bond issuance is successful, Lippo Karawaci will further extend its debt maturity profile to approximately seven years from 6.5 years now, and strengthen its ability to pursue its aggressive expansion plan," says Jacintha Poh, a Moody's Analyst.
"However, total debt and interest expenses will rise in the near term, negatively affecting its credit metrics in FY2014. On the other hand, the company will gradually benefit from sustained improvements in recurring income over the next two years," adds Poh, who is also the Lead Analyst for Lippo Karawaci.
Lippo Karawaci intends to construct 24 hospitals and 19 retail malls over the medium term. It is already constructing four hospitals and two retail malls from this total.
Given that its capital expenditure -- which is not committed and thereby allows the company the flexibility to scale down its expansion plans -- is likely to incorporate some level of debt funding (including the proposed bond issuance), we expect its leverage (adjusted debt/book capitalization) to weaken to 46%-48% from 45% in FY2013, but for interest coverage (adjusted EBITDA/ interest expense) to improve to 3.0x-3.3x from 2.1x, as growth in EBITDA outpaces higher interest expenses in FY2014.
"Nevertheless, Lippo Karawaci has consistently held adequate cash holdings, maintained a well-balanced debt maturity profile, with its next significant debt maturity scheduled only for May 2019. Moody's therefore believes the company will continue to balance its growth and financial discipline," says Poh.
The funding of Lippo Karawaci's expansion plan will also depend on its ability to sell completed hospitals and retail malls to its sponsored REITs -- First REIT (unrated) and Lippo Malls Indonesia Retail Trust (unrated).
As of 31 December 2013, the company had cash and cash equivalents of IDR1.9 trillion (USD155 million) and total debt of IDR7.8 trillion (USD640 million), of which IDR17 billion (USD1 million) will mature over the next 12 months.
"Lippo Karawaci faces development risks associated with its expansion plans, but this situation is mitigated by its diversified property portfolio and growing recurring income base, which provides stability. Although Moody's expects growth in sales to slow, Lippo Karawaci's healthcare segment will remain resilient," says Poh.
The stable outlook on the ratings reflects Moody's expectation that Lippo Karawaci will maintain financial discipline while pursuing its growth strategy.
Lippo Karawaci's ratings are unlikely to be upgraded in the next 12-18 months, as it is embarking on its expansion plans.
However, we will consider upgrading the ratings if Lippo Karawaci: 1) continues to display financial discipline and improve its credit metrics, while pursuing growth, 2) strengthens the recurring income from its retail malls, healthcare, and hospitality property segments, as well as its portfolio management business, 3) achieves sustained sales performance and generates improved cash flows that raise its liquidity position, and 4) can show that its asset-light strategy is sustainable.
Specific credit metrics that we consider as indicative of an upgrade include: 1) recurring EBITDA/interest coverage above 2.0x-2.5x, 2) EBITDA/interest coverage above 4.0x-4.5x, and 3) adjusted debt/book capitalization below 40%-45% and adjusted debt/EBITDA below 3.0x on a sustained basis.
Downward pressure could emerge if Lippo Karawaci's financial and liquidity profile weakens due to: 1) the company failing to execute its business plans, 2) a deterioration occurring in the property market, resulting in protracted weakness in Lippo Karawaci's operations and credit profile, and 3) a material depreciation in the rupiah, which in turn increases the company's debt-servicing obligations.
Specific credit metrics that we consider as indicative of downgrade include: 1) recurring EBITDA/interest coverage below 1.0x, 2) EBITDA/interest coverage below 2.5x, and 3) adjusted debt/book capitalization above 50% and adjusted debt/EBITDA above 4.0x on a sustained basis.
The principal methodology used in these ratings was the Global Homebuilding Industry published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
PT Lippo Karawaci Tbk is one of the largest property developers in Indonesia, with a sizable land bank of around 1,569 ha as of 31 December 2013. Since 2004, the company has diversified into the healthcare and hospitality businesses, as well as infrastructure development. Its recurring income continues to grow, comprising around 50% of total revenue over the last three years.
