Fitch Ratings downgrades Lippo Mall Indonesia Retail Trust on higher debt costs, upcoming debt maturities and currency impact
Fitch Ratings has downgraded Lippo Malls Indonesia Retail Trust's (LMIRT) Long-Term Issuer Default Rating (IDR) to 'B-', from 'B'. The Outlook is Negative. The agency has also downgraded the rating on LMIRT's senior unsecured notes due 2024 and 2026 to 'B-', from 'B'; with the Recovery Rating remaining at 'RR4'. The notes are issued by its wholly owned subsidiary, LMIRT Capital Pte. Ltd, and are guaranteed by Perpetual (Asia) Limited, in its capacity as trustee of LMIRT.
The downgrade and Negative Outlook reflect rising refinancing risk. Two-thirds of LMIRT's debt, including US$250 million of senior unsecured notes, will mature in the next 18-20 months, for which the trust will need external financing. LMIRT has demonstrated its ability to tap banks and capital markets even during the height of Covid-19 pandemic, but execution risks have increased significantly as capital-market conditions have turned unfavourable.
“We also expect LMIRT's funds from operation (FFO) fixed-charge cover, which includes the coupons on its perpetual securities, to fall to 1.0x in the next 12-18 months, as a result of the trust's high exposure to rising interest rates, while the recovery in the REIT's operating cashflows may be pressured further if the Indonesian rupiah continues to depreciate,” Fitch notes
LMIRT has a US$135 million bank loan due in November 2023, $82.5 million of bank loans due in January 2024, and the US$250 million medium-term note due in June 2024. Fitch expects the trust to be able to refinance its US$135 million bank loan in the next six months, as we believe its access to bank markets is sufficient.
Rising interest rates are likely to increase LMIRT's interest payments to $60 million in 2022 and $72 million in 2023, from $55million in 2021. Around 57.8% of LMIRT's outstanding borrowings are on
floating rates. “We have factored in a benchmark interest rate of around 400bp in 2023,” Fitch says.
Fitch is also expecting LMIRT's annual perpetual securities' coupon to rise to $21 million in 2023 from $17 million in 2022 once the coupon rate on the $120 million perpetual securities is reset to the current floating-rate benchmark plus the fixed initial spread on its first call date of Dec 19, 2022. LMIRT can opt not to pay the coupon on a non-cumulative basis under the terms of the securities, but this will provide it with only limited additional headroom to manage its cash flows, Fitch says.
Currency risk is high as LMIRT's debt is denominated in US dollars or Singapore dollars, while revenues are generated solely in rupiah, which has depreciated by nearly 10% in the last two months. The rupiah's depreciation will reduce the value of cash flows and assets in Singapore dollar terms, pressuring interest coverage and the loan-to-value ratio (LTV). LMIRT has hedged around 60% of the notional value of its rupiah cash flows for 2023 using option contracts, but this only provides partial protection against a further decline in the exchange rate.