OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based property developer PT Lippo Karawaci Tbk's (Lippo) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. The agency has also affirmed Lippo's National Long-Term Rating at 'A+(idn)' with a Stable Outlook. A full list of rating actions is given at the end of this commentary.

Lippo's ratings reflect its strong market position and its demonstrated track record as a property developer in Indonesia. The ratings also consider its strong recurring cash flows generated by its portfolio of owned and/or managed healthcare, retail, and hospitality assets, its fee-based income, and dividends from the real estate investment trusts (REITs) that it manages. Lippo has strong access to US dollar bond markets, which it has used to stagger its debt maturities, minimising refinancing risk.

Lippo's ratings also reflect its smaller operating scale compared with higher-rated international peers, as well as its aggressive medium-term expansion plan, which is likely to keep leverage (defined as net adjusted debt / net property assets) high.

KEY RATING DRIVERS

Cash Generation to Improve in 2016: We expect Lippo's cash generation to improve in 2016, mainly due to the planned sale of a few of its mature retail and healthcare assets to the REITs it sponsors. Housing sales should also pick-up in 2016 off a lower base in 2015, supported by Lippo's brand. Lippo sold just under IDR3trn worth of property during the first nine months of 2015, which was 73% of its revised annual target of around IDR4trn. Lippo lowered its 2015 marketing sales target from around IDR5trn initially, because of weak domestic demand. Many of Lippo's domestic peers also lowered their sales targets for 2015, as a result of challenging macroeconomic conditions and regulatory uncertainty.

Strong Recurring Cash Flows: Lippo has a portfolio of assets that generate strong recurring income, including one of the largest private-sector hospital operators in Indonesia, for which there is robust demand, and also one of the largest retail-mall franchises. The portfolio also includes several hotels, and educational institutions. Lippo also receives dividends from the REITs that it manages. In aggregate, these sources generated recurring EBITDA of around IDR1.2trn at end-2014. Lippo's hospitals accounted for more than half of these cash flows, which support its fairly stable coverage of fixed-charges, such as interest and operating lease rent. We expect Lippo's recurring EBITDA / fixed charge cover to improve to more than 1.2x in 2016 and beyond (2014: 0.9x; 2013: 1.0x) in line with the planned expansion of its hospitals and malls.

Aggressive Medium-Term Expansion: Lippo plans to continue expanding its hospital portfolio outside of Jakarta, in a bid to gain a first-mover advantage in its targeted geographies. The company expects to spend between IDR4trn and IDR8trn through 2018 on expanding its hospitals and retail malls, depending on the demand for and priority of such projects. However only about half of this capex is committed, and we expect that much of the funding for the expansion will be generated via asset sales to its REITs.

Limited Rating Headroom: Lippo's leverage stood at 49% at end-September 2015, higher than the 39% at end-2014 mainly because of slower presales and cash collections, as well as a sharp depreciation of the Indonesian rupiah in 3Q15. Fitch notes that Lippo's leverage is high for its 'BB-' IDR. However the agency expects Lippo to maintain leverage below 50% over the medium term, supported by its ability to prefund its capex and land-banking through its sponsored-REITs. The company's inability to prefund its capex and land-banking in this manner or via other non-debt sources may result in negative rating action.

Fitch has also revised the rating sensitivities, including the measure for interest coverage, which will now be assessed on a consolidated basis for the company (see Rating Sensitivities below). This is in line with our treatment of most property developers in the Asian region, and is a better measure of the evolving risk profile stemming from the medium-term expansion of Lippo's recurring revenue businesses.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Housing sales will increase to more than IDR4.5trn in 2016
- EBITDA margin will weaken in 2015 to around 30%, but improve in 2016
- Asset sales to sponsored REITs will increase in 2016 and 2017
- Lippo will spend between IDR4trn and IDR8trn on capex through 2018

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-A sustained increase in leverage to more than 50%
-A sustained weakening in the ratio of EBITDA from recurring sources to interest cost and operating lease rent to below 1.2x
-Inability to pre-fund capex

Positive: A rating upgrade is not expected in the medium term given Lippo's smaller operating scale and recurring income base compared with higher-rated international peers. We also expect Lippo's leverage to remain high over the medium term as it executes its expansion plans.

FULL LIST OF RATING ACTIONS

PT Lippo Karawaci Tbk
Long-Term Foreign-Currency IDR affirmed at 'BB-';Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BB-'; Outlook Stable
Senior unsecured rating affirmed at 'BB-'
National Long-Term Rating affirmed at 'A+(idn)'; Outlook Stable

Theta Capital Pte Ltd
USD250m outstanding 7% senior unsecured notes due 2019 affirmed at 'BB-'
USD403m outstanding 6.125% senior unsecured notes due 2020 affirmed at 'BB-'
USD150m outstanding 7% senior unsecured bonds due 2022 affirmed at 'BB-'.