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Lippo Group suffers confidence crisis after home of CEO raided

'Negative investor sentiment' hits bond yields of key development arm

Local media reports have pondered whether Meikarta's construction could still go ahead.   © Antara/Reuters

JAKARTA -- Lippo Group, one of Indonesia's largest business conglomerates, is facing a crisis of confidence after news that the home of its CEO had been raided in connection with an investigation into the company's flagship $21 billion development project.

Credit analysts and property experts voiced concerns that allegations of bribery and corruption involving Lippo executives and local officials could put the already troubled Meikarta project at risk and further stretch the company's liquidity. Designed to be a state-of-the-art residential and business district, the Meikarta development has been described as Indonesia's Shenzhen, in reference to China's booming high-tech cluster.

Trung Nguyen, senior credit analyst at research company Lucror Analytics, said: "The resultant uncertainty could dissuade potential buyers, affecting sales. The fall in sales deposits could in turn lead to funding problems."

Shin Furuhata, senior manager at real estate services company JLL Indonesia, noted that the bribery scandal had "no doubt" damaged Lippo's reputation, and that the biggest concern now was how many units the company could sell. 

"Meikarta units were being sold before construction began, with proceeds used to fund construction," he added. "If there is trouble selling units, there is a possibility that [Lippo] will not be able to raise funds for construction, and development will stop."

Shares in Lippo Karawaci, Lippo's property development arm, fell as much as 3.6% on Friday, before ending the day fractionally up at 276 rupiah per share. Its shares have fallen 7.3% this week.

Shares in subsidiary Lippo Cikarang, which develops the 278-trillion-rupiah township outside Jakarta through its subsidiary Mahkota Sentosa Utama, also dropped 2.2% to 1,300 rupiah, highlighting negative investor sentiment plaguing both companies.

Indonesia's Corruption Eradication Commission, or KPK, announced on Monday that it had arrested and named nine people -- four affiliated with Lippo Group -- in an alleged bribery scheme related to Meikarta. On Thursday, the commission announced that it had raided 10 locations, including the home of Lippo Group CEO James Riady, as part of its investigation.

A spokesperson for James Riady said on Thursday that "the search proceeded orderly and professionally, and as stated in the official summary report, there were no documents/items found or seized in relation to the case," and that "Mr Riady remains fully committed to assisting the KPK in their efforts as is necessary."

Local media reports have speculated over whether construction of Meikarta will continue since those arrested are accused of illegally obtaining permits for the project by promising officials from the Bekasi district -- where Meikarta is being built -- 13 billion rupiah ($855,613).

However an immediate halt to construction is unlikely, said Furuhata. "I don't think [the case] means all projects in Meikarta will stop. Construction should continue for the areas covered by permits that were legally obtained," he said. Furuhata stressed that the views were his own and not necessarily those of JLL.

Nevertheless, there are already signs that sales could slow: State-owned Bank Negara Indonesia has decided to stop extending mortgages for the project. New applications "will not be processed until the legal process is complete," said the bank's director Tambok Simanjuntak. The bank has lent around 50 million rupiah to some 200 customers for Meikarta mortgages.

An analyst who asked not to be named warned that Lippo Cikarang could suffer from a revenue standpoint if sales at Meikarta stop, since the project "currently forms more than 90%" of the company's revenue. 

Even before the bribery case, Meikarta had been hampered by numerous problems, including a lawsuit over alleged outstanding advertising bills and claims from salespeople about not receiving pay.

The mounting problems have driven up yields on Lippo Karawaci bonds in recent weeks. The developer's dollar notes set to mature in April 2022 stood at 15.92% as of Wednesday, a rise of more than 3% since the start of October. Yields rise as prices fall. Similarly, yields on dollar notes set to mature in October 2026 reached 13.46%, a rise of more than 2% over the same period.

"Negative investor sentiment resulting from the allegations could aggravate Lippo Karawaci's poor liquidity and further drive up the yield-to-maturity on the company's outstanding U.S. dollar bonds," wrote analysts at Moody's on Wednesday. "This means Lippo Karawaci will have to pay more interest expense as it refinances its debt coming due over the next 12-18 months."

The ratings agency estimates that should Lippo Karawaci refinance 1.3 trillion rupiah of debt due this year and next at a rate reflecting the heightened yields, the company's interest burden could increase around 6%, or 60 billion rupiah, "which will add pressure on Lippo Karawaci's already fragile liquidity position, given its cash burn rate of around IDR1.1 trillion and IDR1.3 trillion in 2018 and 2019, respectively."

Deteriorating cash flow at the company had already forced Lippo Karawaci to sell some of its assets, but "we believe the company would continue to face liquidity pressure because its cash and funds from asset disposal will only be enough to meet debt-servicing needs over the next one year," said S & P Global Ratings.

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