OREANDA-NEWS. S&P Global Ratings today lowered its long-term corporate credit rating on Indonesia-based property developer PT Lippo Karawaci (Lippo) to 'B+' from 'BB-'. The outlook is stable. We also lowered our issue rating to 'B+' from 'BB-' for all the outstanding senior unsecured notes issued by Theta Capital Pte. Ltd. Lippo guarantees the notes. At the same time, we affirmed our 'axBB' ASEAN regional scale rating on Lippo.

The downgrade reflects our expectation that Lippo's leverage will stay high and its interest-servicing capacity will remain thin in 2016 amid soft property sales and delayed asset sales. In our opinion, Lippo's cash flow adequacy and interest-servicing capacity are also unlikely to recover in line with our earlier expectations for a 'BB-' rating in 2017.

"We project Lippo's property sales to be below Indonesian rupiah (IDR) 1 trillion for the half-year ended June 30, 2016, amid a still-soft domestic property market," said S&P Global Ratings analyst Kah Ling Chan. "We earlier forecast IDR4.8 trillion in property sales for the full year. We now anticipate the company's property sales will reach a maximum of IDR3.0 trillion in 2016, compared with IDR3.6 trillion in 2015 but much lower than IDR5.2 trillion in 2014."

Lippo's EBITDA, cash flows, and credit metrics are unlikely to recover materially in 2017, in our opinion. Although the recent passing of the tax amnesty could boost consumer sentiment, it will take at least 12 months, in our view, for property sales to reach the levels of 2013 and 2014. Even in that situation, higher property sales in 2017 will only materially benefit EBITDA, operating cash flows, and credit metrics in 2018, given the time lag between property sales and revenue and profit recognition.

Lippo earlier expected to sell its St. Moritz retail mall to Singapore-listed Lippo Malls Retail Trust (LMIRT) by 2017. We had viewed such sales as instrumental to a strengthening in the company's financial standing. Nevertheless, we have observed delays in these divestments, either because of regulatory considerations or longer negotiation time on structure or pricing. The sale of the company's Jogya and Kuta assets to LMIRT, for example, for a combined value of about IDR1.3 trillion, was originally slated for 2015. The transaction is now likely to be completed by the end of 2016.

"The sale of St. Moritz retail mall in Jakarta, with valuation potentially exceeding IDR6 trillion, is unlikely to close in 2017, in our view. We believe raising sufficient funds for this purchase through a real estate investment trust (REIT) in Singapore will be challenging," Ms. Chan said. "That's because the new maximum leverage rules on Singapore REITs effective January 2016 limit gearing to 45%."

We estimate LMIRT's debt-to-asset ratio will be about 40% by the end of 2016 after completing the purchase of the Jogya and Kuta malls, leaving it with limited room to further increase its debt without impairing its credit standing. LMIRT has the first right of refusal for these assets. Lippo must offer this asset to LMIRT before contemplating other disposal venues, which could further delay the sale.

In our view, Lippo's competitive advantage will remain intact. The company is among the largest real estate developers in Indonesia. Its operations are also more diversified than peers', with about 30% of gross profit from its more stable healthcare and real estate investment operations.

The stable outlook reflects our expectation that Lippo's cash flow adequacy and interest-servicing capacity will stabilize at lower levels over the next 18 months. We expect EBITDA interest coverage to remain slightly below 2.0x. The outlook also reflects our expectation that the company will maintain its cash balance, dispose of land or assets, or reduce capital expenditure where necessary.

We could lower the rating if the company continues to register markedly lower property sales while aggressively investing in working capital and expansion. Weakness in its leverage and interest-servicing capacity could also stem from continued delays in asset disposals, which will raise uncertainty in the continuity of its asset-light business model. An EBITDA interest coverage approaching 1.5x with no prospect for recovery is a clear indication of that weakness.

We could raise the rating if Lippo materially improves its leverage and interest coverage and maintains adequate liquidity, such as by the sale of assets. Lippo could also practice financial prudence, reining in its capital expenditure. We may consider the upgrade if EBITDA interest coverage stays materially above 2.5x and the company's debt-to-EBITDA ratio is below 5x.