Fitch Ratings Singapore has downgraded Lippo Malls Indonesia Retail Trust D5IU 's (LMIRT) Long-Term Issuer Default Rating (IDR) to 'C' from 'CCC'.
The trust’s senior unsecured notes due 2026 have also been downgraded to a 'C' from 'CCC' and has a revised recovery rating of 'RR4' from 'RR6' previously.
The notes are issued by LMIRT's wholly owned subsidiary, LMIRT Capital, and are guaranteed by Perpetual (Asia) in its capacity as trustee of LMIRT.
All ratings have been removed from Rating Watch Negative, as at July 1.
The downgrade comes on the back of LMIRT’s announcement of its proceeding with a tender offer, which is subject to the satisfaction of the conditions in the offering memorandum.
In Fitch’s view, the trust’s tender offer constitutes a distressed debt exchange (DDE), as the transaction leads to a material reduction in terms and allows the issuer to avoid an eventual probable default, given LMIRT’s “untenable” liquidity profile.
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Upon the completion of the DDE, Fitch will downgrade LMIRT's IDR to 'Restricted Default' (RD) and further reassess the ratings in line with the post-restructuring capital structure.
As at July 12, LMIRT has received valid tenders valued at USD$125.9 million ($169.09 million) of notes due 2026, which makes up 84.8% of outstanding notes.
“It also received valid consents to remove material covenants from no less than a majority in aggregate principal amount of the notes due 2026,” adds the team at Fitch.
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Additionally, the revision of the recovery rating on LMIRT’s senior unsecured notes reflects significant lower unsecured recovery prospects for the trust following the drawdown of the IDR2 trillion ($166.50 million) secured term loan, which ranks ahead of the notes, to fund the tender offer.
“Post-tender offer, the proportion of secured term loans will increase to above 95% of total debt, resulting in increased subordination of unsecured noteholders,” writes the team.
LMIRT’s regulatory gearing ratio is expected to be above the regulatory ceiling of 45% at end-June, as per the trust’s estimates.
This follows the recent depreciation of the Indonesian rupiah against the Singapore dollar, which exacerbates asset value declines resulting from the portfolio’s weakening performance in the last 18 to 24 months.
As such, this further limits the trust's ability to obtain debt other than for refinancing, such as to fund capital expenditure, negatively affecting LMIRT's financial flexibility.
Additionally, the team forecast a net property income of $121 million for the trust in 2024, a decline from past years of 2022 and 2023.
This follows LMIRT’s progressively declining occupancy rate which stood at 79.5% in 1Q204.
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Fitch notes that this is mainly due to the early termination of several lease agreements and downsizing by supermarket anchor tenants Carrefour and Hypermart, respectively.
“We expect the trust to face challenges in raising occupancy in the next 12 to 18 months given difficulties in funding refurbishment, which will further pressure LMIRT's operational performance,” says the team.
Following strong going-concern and gone-concern loss absorption features, the team at Fitch is currently treating the trust’s $260 million in perpetual securities, issued in 2016 and 2017, as 100% equity.
This also factors in LMIRT's intention to maintain the securities as a permanent part of its capital structure.
The team also notes that the trust did not call the $140 million and $120 million securities callable in 2021 and 2022, respectively, due to weak market sentiment.
Since March 2023, the trust has cancelled the perpetuals' coupons to preserve cash, preventing it from paying common dividends.
As at 11.35am, units in LMIRT are trading at 0.1 cents lower or 5% down at 1.9 cents.
