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Lippo Karawaci hits out at Fitch rating downgrade

Property developer says 'comfortable' with debt maturity profile, asset sales

Fitch Ratings says its latest downgrades follow "significant weakening" of Lippo Karawaci's property-development cash flow. (Photo by Shinya Sawai)

JAKARTA -- Indonesian major property developer Lippo Karawaci on Monday protested Fitch Ratings' recent decision to cut its credit rating by two notches, in another blow to the Lippo conglomerate which has seen employees arrested as part of a bribery investigation into its flagship development project.

Fitch on Friday announced its downgrade of Lippo Karawaci's long-term foreign- and local-currency issuer default ratings from B to CCC+ -- citing liquidity risks as a result of uncertainty over asset sales, on which Lippo has been increasingly reliant to service debt obligations. The ratings agency added that uncertainty had been "potentially exacerbated" by bribery allegations surrounding Meikarta, a $21 billion urban project outside Jakarta developed by Lippo subsidiary Mahkota Sentosa Utama.

The group hit out at Fitch's downgrade. "We regret Fitch's decision to lower [Lippo Karawaci]'s rating from B to CCC+," Lippo said in a press statement. "This decision is unsubstantiated by the liquidity, balance sheet, credit quality nor business model of [Lippo Karawaci]."

Lippo argued that its asset divestment projects are in "advanced stages of completion."

"While execution risks remain, we believe the quality of assets make completion a high certainty even amid current volatility," the company said. "[Lippo Karawaci] would be well positioned to meet its liquidity needs, and capitalize on compelling opportunities unique to current market volatility."

Concern has been mounting for several months over the property group's financial robustness, and the group has been downgraded by Moody's three times in the past 18 months.

Lippo's disposals are aimed at alleviating these concerns by raising funds to meet operating cash flow and interest payments over the next few years. The company said it has generated 2.2 trillion rupiah ($146.8 million) from disposals to its Singapore-based affiliates, OUE and OUE Lippo Healthcare. It said in total it would raise more than 6 trillion rupiah including the upcoming sale of Lippo Mall Puri, a shopping mall in West Jakarta, the divestment of its remaining stake in First REIT, as well as its stake in a hospital in Myanmar.

As a result, Lippo said it would have a strong balance sheet and "comfortable" debt maturity profile. "All this equates to approx. RP 14 Trillion in Debt versus RP 53 Trillion in Assets at acquisition value, and perhaps 20-30% higher if revalued to reflect current market prices," Lippo said.

However, Fitch said its latest downgrades follow "significant weakening" of Lippo Karawaci's property-development cash flow, owing to "sustained poor demand" for the company's products due to its focus on mid- to high-end customers, as well as weak execution of some projects that "could diminish the strength of Lippo's brand."

It noted that Lippo plans to sell its noncore assets to meet operating cash flow and interest payments over the next few years. "However, these sales are subject to significant uncertainty and market risk that is beyond management's control."

Indonesia's anti-graft officials last month arrested four people affiliated with Lippo Group, including director for operations Billy Sindoro, for allegedly bribing officials at Bekasi regency in West Java province where Meikarta is being built, to smooth the permit processing. They also have raided homes of Lippo Group Chief Executive James Riady, son of Lippo founder Mochtar Riady, and questioned him as a witness for nine hours last week. Riady has denied any wrongdoing.

"Lippo's credit profile could weaken further if this [the Meikarta case] results in a large financial liability," Fitch said.

Lippo, in its statement, said it is saddened by the bribery allegations and will support law enforcement's process, but denies involvement in the case.

Lippo's share closed at 280 rupiah on Monday, down 0.7% from Friday's closing.

Nikkei staff writer Shotaro Tani contributed to this story.

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