SINGAPORE (May 11): On May 5, OCBC Credit Research pointed out that Lippo Mall Indonesia Retail Trust did not accrue distributions to perpetual holders under its statement of distribution.

Then came this announcement: “From May 11, 2020, Maybank Kim Eng will cease financing for Lippo Malls, this includes Lippo Malls Indonesia Retail Trust, Lippo Malls Indo 6.6% 221219 and Lippo Malls Tr $140M7%PERPSEC, in view of the recent adverse news. As such, we require affected clients to deposit additional margin by 22 May 2020, to satisfy the margin call,” the broker says.

According to LMIRT’s 1QFY2020 financial statement it reported income available for distribution for unitholders at $14.55 million, and for perpetual security holders at $4.37 million.

But its manager said in a statement: “These perpetual securities confer the right to receive distributions semi-annually but the Trust has the discretion to elect not to pay any distribution for each period. As these perpetual securities are subordinated in nature to senior obligations and in view of the uncertain situation around the Covid-19 pandemic, no distributions attributed to these perpetual securities have been accrued.”

LMIRT issued perpetual securities of $140.0 million at a distribution rate of 7.0% per annum and $120.0 million at a distribution rate of 6.6% per annum in September 2016 and June 2017 respectively.

The issuer is required to give not less than 3 business days’ notice to the note trustee whether any any distributions to the perpetual security holders would be made. Hence LMIRT’s manager said the decision on distributions would be decided closer to that timeline.

Not paying distribution to REITs’ perpetual security holders is not a default. The Monetary Authority of Singapore allowed perpetual securities be excluded from aggregate leverage so long as:

a) the securities have a perpetual term;

b) the redemption is at the sole discretion of the property fund or trust;

c) the distributions are non-cumulative;

d) there are no features that will have the effect of incentivising the property fund to redeem its units (e.g. step-up in interest rates); and

e) the securities are deeply subordinated in the event of liquidation.

“Perpetuals in general face higher risks of deferral of distributions as a result of Covid-19. We think LMRT may set the precedence for other issuers if they similarly face little certainty of resumption in cashflows,” says OCBC Credit Research, in a May 5 update.

Other REITs with perpetuals include SPH REIT, Ascendas REIT, Ascott Residence Trust (ART), ESR-REIT, Mapletree Logistics Trust (MLT), Soilbuild Business Space REIT and Keppel REIT.

Elsewhere, banks have issued perpetual securities, known as Additional Tier 1 Capital or AT1 which are loss absorbing. To the local banks, their AA credit rating is sacrosanct, hence they are unlikely to withhold distributions.  

Similarly, to REITs such as Ascendas REIT, ART, and MLT, ratings are important because they enable REITs to access the bond market, and hence they too are unlikely to withhold distributions to their perpetual security holders.