AFTER downgrading Lippo Malls Indonesia Retail Trust&rsquo s (LMIRT) long-term issuer default rating to &ldquo CCC-&rdquo from &ldquo CCC&rdquo in April, Fitch Ratings has placed the Indonesia-focused real estate investment trust (Reit) on its &ldquo rating watch negative&rdquo list.

 

This is to reflect Fitch&rsquo s view that LMIRT&rsquo s proposed tender offer and consent solicitation exercise constitutes a distressed debt exchange, said the ratings agency on Thursday (Dec 14).

 

It also believes LMIRT&rsquo s rating is likely to be downgraded to &ldquo C&rdquo if the consent solicitation exercises are successful, and if the tender offer is accepted by investors.

 

Based on Fitch&rsquo s ratings scales, a &ldquo CCC&rdquo rating signifies substantial credit risk with a very low margin for safety, with default as a &ldquo real possibility&rdquo . In comparison, the lower &ldquo C&rdquo rating points to a near default &ndash where a default, or default-like process has begun. 

 

To recap, LMIRT on Dec 11 launched tender offers related to its outstanding 7.25 per cent senior notes due 2024, and 7.5 per cent senior notes 2026. Under the offers, the trust proposed to repurchase its 2024 notes at US$765 per US$1,000, and the 2026 notes at US$665 per US$1,000 via a fixed-price offer.

 

It also launched consent solicitation exercises related to proposed amendments to indentures of the notes, which currently prevent LMIRT from pledging its assets as security for debt financing.

 

Fitch said the overall transaction will lead to a material reduction in terms for existing unsecured noteholders &ndash and, in turn, help the trust to avoid a default on its US dollar-denominated notes, given LMIRT&rsquo s &ldquo untenable liquidity profile&rdquo .

 

&ldquo The &lsquo rating watch negative&rsquo (status) reflects the uncertainty that the majority of noteholders by outstanding principal may not consent to the proposed covenant amendments,&rdquo it added.

 

The agency also foresees an increase in secured debt for the trust with its proportion of pledged assets estimated to increase to around 45 per cent of total investment property, assuming its proposed loan of 2.5 trillion rupiah (S$214.3 million) is fully drawn down to fund the tender offer.

 

&ldquo This leads to a rise in legal and structural subordination for unsecured holders of the remaining stub, who will rank behind these secured creditors,&rdquo noted the agency.

 

A stub refers to residual equity created after a company&rsquo s restructuring or bankruptcy.

 

&ldquo Following the tender offer, we expect a remaining stub on the 2024 and 2026 notes, as the secured loan is not sufficient to buy back all the outstanding notes.&rdquo

 

Fitch is forecasting LMIRT to report net property income of S$123 million in 2024 &ndash similar to 2023 estimates, and less than that of 2022 due to lower occupancy rates.

 

&ldquo We expect occupancy to only improve gradually, as it will take time for LMIRT to find alternative tenants to fill the vacancies. We expect its operations to improve from 2025, when redevelopment activities at several malls are expected to be completed.&rdquo

 

It however cautioned that the Reit remains exposed to high foreign exchange risks as its revenue is generated solely in rupiah, whereas its debt is denominated in US and Singapore dollars.

 

&ldquo Further rupiah depreciation will reduce the value of cash flow and assets in Singapore dollars, increasing pressure on interest coverage and the loan-to-value ratio.&rdquo

 

Embattled Lippo Mall Indonesia Retail Trust (LMIRT) has been thrown a lifeline. On Dec 11, LMIRT&rsquo s manager announced that it has obtained a IDR2.5 trillion (the equivalent of $215.72 million) amortising term loan for six years, subject to certain conditions including a consent solicitation exercise.

 

The new loan will be used to finance the repurchase of the outstanding 7.25% senior notes due in 2024, and the 7.5% senior notes maturing in 2026 and the consent fee.

 

The drawdown of the IDR2.5 trillion facility is conditional upon obtaining requisite consents from the holders of the 2024 notes and the 2026 notes.

 

Here comes the bad news. LMIRT is offering to buy the 7.25% 2024 notes at 76.5 cents per dollar, and the 7.5% 2026 notes at 66.5 cents per dollar. The outstanding amounts for the 2024 and 2026 notes are US$231.8 million and US$190.6 million respectively. &ldquo The drawdown of the IDR2.5 trillion loan is conditional upon obtaining consents from the bondholders,&rdquo OCBC Credit Research notes.

 

Furthermore, post the consent, &ldquo the USD bondholders will be subordinated to the IDR2.5 trillion loan given the that this loan is secured by one of the largest assets of LMIRT. Meanwhile the other two of LMIRT&rsquo s largest assets were secured by another $200 million loan granted in October 2023,&rdquo OCBC Credit points out. As at Sept 30, LMIRT&rsquo s three largest malls are Lippo Mall Puri (valued at $345.44 million), Sun Plaza ($232.97 million) and Lippo Mall Kemang ($195.46 million).

 

The expiration time is at 4pm GMT on Dec 20 for both the 2024 and 2026 notes, and the consent settlement date is no later than Dec 22 unless changed by the issuer. 

 

Also on Dec 11, LMIRT' s manager announced that it won' t be paying distributions on its   $120,000,000 Perpetual Securities issued on June 19, 2017. The dividend stopper applies. 

 

LIPPO Malls Indonesia Retail Trust (LMIRT) posted a 6 per cent drop in net property income (NPI) to S$30.6 million for its third quarter ended September, from S$32.8 million in the corresponding year-ago period.

 

Gross revenue slipped 3.8 per cent to S$49.8 million for the quarter, from S$51.7 million a year ago. Rental revenue also dipped 6.2 per cent to S$28.1 million from S$29.9 million.

 

In a bourse filing on Thursday (Nov 9), the manager of LMIRT attributed these declines to the rupiah&rsquo s 5.8 per cent year-on-year currency depreciation against the Singapore dollar, as well as lower rental contributions of S$0.7 million from Lippo Plaza Jogja, a shopping centre in Indonesia.

 

This lower rental contribution was due to the expiry of master leases in December 2022, the manager added.

 

No distribution will be paid to holders of its S$140 million and S$120 million perpetual securities, as the trust had announced earlier this year.

 

For the nine months ended September, NPI was down 4.9 per cent to S$93.8 million, as compared to S$98.7 million for the same period a year ago. Gross revenue was down 3.2 per cent to S$149.4 million, while rental revenue came in 7.2 per cent lower at S$84.1 million.

 

Meanwhile, the trust&rsquo s portfolio occupancy declined to 76.8 per cent for the quarter, down from 81.4 per cent recorded in the previous quarter ended Jun 30, 2023.

 

This was mainly due to the early termination and downsizing of Carrefour anchor leases in shopping malls Palembang Square, Tamini Square and Lippo Plaza Kramat Jati, said LMIRT&rsquo s manager. It added that initiatives have been taken to convert these vacated spaces to cater to mini-anchor or speciality tenants.

 

As at end-September, its gearing ratio stood at 43 per cent, with interest coverage at 1.97 times on higher year-on-year interest expenses.

 

James Liew, chief executive officer of the manager, noted that the trust has secured support from its existing relationship lenders to extend its maturing loans.

 

Last month, the trust announced that it had entered into amendment and restatement agreements. This was in respect of its two loan facilities of S$67.5 million, with each maturing on Nov 9, 2023. In addition, it has another S$110 million loan facility &ndash S$82.5 million would be maturing on Jan 6, 2024, while the remaining S$27.5 million would be maturing on Jan 6, 2026.

 

These loan facilities were extended with effect from Nov 3, 2023 with a final maturity on Nov 2, 2026 following the upfront prepayment of S$47 million. Certain properties have been provided as collateral to the lenders of these agreements.

 

These extensions come as the trust continues to &ldquo exercise prudence&rdquo in its capital management, by conserving cash to stabilise its performance in a &ldquo challenging high interest rate and depreciating IDR environment, exacerbated by geopolitical tensions and subdued global and domestic economy&rdquo .

 

&ldquo Despite the successful extension of the loans in 2023, given the challenges outlined above, distributions to both the perpetual securities holders and unitholders will unfortunately remain constrained until a comprehensive solution is determined for the trust&rsquo s maturing debts in 2024,&rdquo said Liew.