Fitch Ratings Singapore has placed Lippo Malls Indonesia Retail Trust D5IU 's (LMIRT) long-term issuer default ratings (IDR) of ‘CCC’ on rating watch negative (RWN).
The trust’s senior unsecured notes due 2026 issued by LMIRT’s subsidiary, LMIRT Capital Pte. Ltd., has also been placed on RWN. The notes have a ‘CCC’ rating with a recovery rating of ‘RR4’. According to Fitch’s ratings, securities rated ‘RR4’ have characteristics that are similar to securities historically recovering 31% - 50% of their current principal and related interest.
In Fitch’s view, LMIRT’s proposed tender offer and concurrent consent solicitation constitute a distressed debt exchange (DDE).
“The combination of a tender offer plus consent solicitation to remove substantially all restrictive covenants imposes a material reduction in terms, in our view,” says the team at Fitch.
The team adds that this could negatively affect existing unsecured noteholders, increasing their legal and structural subordination.
Given LMIRT’s depleting cash reserve and weak operating cash flow, the REIT’s liquidity is currently “untenable”.
See also: Goldman Sachs upgrades China growth forecasts on latest stimulus
LMIRT has since announced its plans to spend around $48 million in refurbishments over the next two years, repurposing recently vacated spaces including by Carrefour and Hypermart to improve occupancy and the value of its malls.
“We expect operating cash flow to be sufficient for debt servicing, including meeting amortisation payments on onshore term loans, but we forecast the trust will have to dip into its cash reserves to fund capex in the next 12 - 18 months or delay the expenditure, given the regulatory limitations on raising new bank debt,” writes the team.
Additionally, following the REIT’s progressively lower occupancy rate, which stood at 79.5% in 1QFY2024, Fitch has lowered its net property income (NPI) forecast for FY2024 to $121 million.
See also: KGI Asia maintains ‘buy’ call and TP of $3.60 for Wilmar International
This comes on the back of early terminations of several lease agreements and downsizing by supermarket anchor tenants Carrefour and Hypermart, respectively.
LMIRT’s gearing is expected to be above the regulatory ceiling of 45% as at June 30, as per the trust’s estimates. This follows the recent rupiah depreciation against the Singapore dollar which has exacerbated asset value declines due to the portfolio’s weakening performance.
This further limits the trust's ability to obtain debt other than for refinancing, negatively affecting LMIRT's financial flexibility.
The trust also has limited unencumbered assets or assets that are free from creditor claims or liens. “We believe LMIRT has pledged the majority of its Hak Guna Bangunan (a type of land title) and strata malls following the increase of its secured loan facility to IDR4.5 trillion ($372 million) in June 2024 to fund the tender offer,” says the team at Fitch.
As such, the team believes that the REIT will continue to face difficulties securing further secured debt.
Following LMIRT’s utilisation of proceeds valued at IDR2.2 trillion from a rupiah-denominated term loan to fund bond buybacks, the REIT’s proportion of rupiah debt will exceed 95%.
That said, Fitch notes that, if accepted by 2026 note holders, the tender offer will reduce LMIRT’s foreign currency risk.
For more stories about where money flows, click here for Capital Section
Riding on the assumption of the success of the REIT’s consent solicitation in amending material covenants, Fitch expects a further downgrade of LMIRT’s rating to ‘C’.
“The RWN reflects the uncertainty that the majority of noteholders by outstanding principal may not consent to the proposed covenant amendments,” concludes the team.
As at 2.37pm, units in LMIRT are trading 0.1 cent lower or 5.88% down at 1.6 cents.
