Moody's Investors Service on Thursday placed the Baa3 issuer rating of Lippo Malls Indonesia Retail Trust (LMIRT) on review for downgrade.
"The review for downgrade was driven by the deteriorating credit quality of key entities within the Lippo group, which contribute around one-third of LMIRT's revenue," says Jacintha Poh, a Moody's Vice President and Senior Analyst in a report on Thursday.
LMIRT is closely linked to the Lippo group of companies, due to these companies' roles as sponsor, property pipeline provider, REIT manager, property manager and tenants.
The exposure is credit negative, particularly given the deteriorating credit quality of key entities within the group, namely Lippo Karawaci Tbk (P.T.) (B1 stable) and Matahari Putra Prima Tbk (P.T.) (B1 stable), which were both downgraded this year, the ratings agency said.
Over the next 12-18 months, Moody's expects that LMIRT will continue to derive a third of its revenue from the Lippo group of companies, particularly after the trust extended the master lease agreement at Lippo Mall Kemang with Lippo Karawaci for a further two years until the end of 2019.
"We expect that LMIRT's financial metrics will weaken, on the back of aggressive acquisitions, such that the trust will prove more vulnerable to foreign exchange rate fluctuations and asset devaluations," adds Poh, who is also Moody's Lead Analyst for LMIRT.
"The trust also faces high refinancing risk with around 30% of its total debt coming due in 2018."
LMIRT's leverage will increase following the proposed debt-funded acquisitions of two retail malls -- Lippo Plaza Jogja and Kediri Town Square -- for S$98.1 million, which are scheduled to complete by the end of 2017.
LMIRT faces a refinancing wall in 2018, because S$100 million in medium term notes will come due in November 2018 and S$90 million of secured loans will be due in December 2018.
While the trust has demonstrated a track record of refinancing its debt maturities, it may not continue to do so, if market liquidity tightens unexpectedly, Moody's said.
Moody's review will focus on LMIRT's ability to reduce its exposure to the Lippo group of companies, improve its financial metrics such that its debt/total deposited asset is well below 40 percent to buffer foreign exchange rate fluctuations and asset devaluations, and address its 2018 debt maturities.
Shares in Lippo Malls Retail plunged 3.7 percent to S$0.40 on the Singapore Exchange.