TEXT-S&P affirms Lippo Karawaci's 'BB-' rtg; rates prpsd nts 'BB-'

(The following statement was released by the rating agency)

Oct 15 -

Overview

-- Lippo Karawaci's expanding property development business, the improving

contribution from the company's healthcare business, and its low-cost land bank will support its

satisfactory performance over the next 12 months, in our opinion.

-- We are affirming our 'BB-' long-term corporate credit rating and our 'axBB+' ASEAN

regional scale rating on the Indonesia-based property developer. At the same time, we are

affirming the 'BB-' issue rating on all of the company's outstanding senior unsecured notes.

-- We are also assigning our 'BB-' issue rating and 'axBB+' ASEAN regional scale rating to

Lippo Karawaci's proposed senior unsecured notes due 2019 and 2020.

-- The stable outlook reflects our expectation that the company's strong property sales and

increasing hospital contributions will offset higher borrowings in the next 12 months, such that

its credit ratios improve to levels commensurate with the current rating.

Rating Action

On Oct. 15, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' long-term corporate

credit rating on Indonesia-based property developer PT Lippo Karawaci Tbk. The outlook is

stable. We also affirmed our long-term 'axBB+' ASEAN regional scale rating on the company. At

the same time, we affirmed the 'BB-' issue rating on all of the company's outstanding senior

unsecured notes. We also assigned our 'BB-' issue rating and 'axBB+' ASEAN regional scale rating

to a proposed issue of US$395.6 million senior notes due 2020 and US$100 million senior notes

due 2019 by Theta Capital Pte Ltd., a special purpose vehicle that Lippo Karawaci

owns. Lippo Karawaci and some of its subsidiaries will guarantee these notes.

Rationale

We affirmed the rating because we believe Lippo Karawaci's improving operating performance

is sustainable over the next 12 months. The continued strong sales of the company's property

development projects and an increasing contribution from its healthcare business will support

its operating performance. Our affirmation assumes that: (1) Lippo Karawaci will successfully

exchange the 2020 notes for its existing US$395.6 million 2015 notes--as it intends to do; and

(2) a net increase in the company's debt of about US$100 million, given its plans to use the

proceeds from the US$100 million 2019 notes to fund the expansion of its hospital and retail

mall businesses, and for general corporate purposes.

In our view, the increase in debt will not significantly alter Lippo Karawaci's financial

risk profile. In our base-case scenario, we expect the company's ratio of lease-adjusted debt to

EBITDA to improve to less than 4.5x by the end of 2013, underpinned by strong presales of

properties, increasing contributions from new hospitals, and a sale of stabilized assets into

listed REITs. However, the ratio will rise to about 4.6x-4.8x in the next six months. Our

forecast considers the company's proposed debt issuance, debt exchange, and operating lease

adjustments arising from the expected sale and lease-back of assets to affiliates. We also

assume that Lippo Karawaci will complete the sale of certain assets to its affiliates over the

next six months: two hospitals and a hotel to First Real Estate Investment Trust

(First REIT: not rated); and two malls to Lippo Malls Indonesia Retail Trust (LMIRT:

not rated). The company's operating performance in the first half of 2012 was significantly

better than our expectation. Revenue improved 28% to Indonesian rupiah (IDR) 2.4 trillion while

pre-tax profit was 43% higher at IDR655 billion compared with the same period in 2011.

Our outlook for the Indonesian property market is positive, underpinned by steady economic

growth in Indonesia, increasing urbanization, and relatively low mortgage rates. Demand for

residential and industrial properties should remain resilient even though economic growth will

slow in the next 12 months.

However, we view Lippo Karawaci's debt appetite to be very aggressive. The company raised

US$150 million in May 2012, also to fund the expansion of its healthcare and shopping mall

businesses. With the proposed issue of US$100 million, we project Lippo Karawaci's debt to reach

US$650 million as of Dec. 31, 2012, an almost two-fold increase from US$350 million as of Dec.

31, 2010. In our view, there is limited headroom for the company to take on additional debt at

the current rating level. Any slippage in its operating performance, particularly in its

property sales, or a further increase in debt would no longer be commensurate with a 'BB-'

rating.

Lippo Karawaci plans to issue the proposed notes due 2020 in exchange for US$395.6 million

guaranteed notes due 2015. The proposed issue will extend the company's debt maturity profile.

We do not view this exchange offer as distressed under our criteria because we believe

noteholders would receive no less than the value of the original securities should they accept

the offer. As of June 30, 2012, Lippo Karawaci has cash of IDR2.9 trillion (approximately

US$307 million), which is adequate to cover the estimated annual interest expense of US$36

million on the 2015 notes. In addition, the company does not have any significant short-term

debt due as of that date.

Liquidity

Lippo Karawaci's liquidity is "adequate," as defined under our criteria. Assuming the

company will exchange the 2015 notes, its debt maturity profile will improve with no significant

debt maturing before 2019. In our base-case scenario, we expect the company's sources of

liquidity to exceed its uses by at least 1.2x over the next 12 months. Our liquidity assessment

is based on the following factors and assumptions:

-- Funds from operations of IDR2 trillion-IDR2.5 trillion in 2012.

-- As of June 30, 2012, Lippo Karawaci has cash and short-term investments of IDR6.0

trillion and committed and undrawn credit facilities of IDR500 billion.

-- Committed capital expenditure and working capital needs for the next 12 months of about

IDR2 trillion-IDR2.5 trillion.

-- Capital expenditure is the main use of liquidity and the company has some flexibility to

adjust this spending.

Lippo Karawaci has good headroom in its financial covenants. As of June 30, 2012, thecompany

complied with the covenants in its bank loan agreements of a minimum interest cover of 1x and

debt-to-equity ratio of less than 2.7x. Its interest cover for the 12 months ended June 30,

2012, was 4.2x and its debt-to-equity ratio was 0.6x. We expect Lippo Karawaci to maintain a

cushion in the covenants in the next 12-18 months, in our base-case assumptions. In the unlikely

event that EBITDA declines by 20%, we expect the company to continue to comply with the

covenants.

Outlook

The stable outlook reflects our expectation that Lippo Karawaci's strong growth from its

property development and healthcare businesses, adequate profitability, and good financial

flexibility will translate to a financial performance--over the next 12 months--that is

commensurate with the rating. The stable outlook also factors in the sale of assets to First

REIT and LMIRT in the next six months, the proceeds of which we expect the company will use

to fund capital expenditure.

We could lower the rating if Lippo Karawaci's capital expenditure is more aggressive than we

expected and its debt is significantly higher than we anticipated. We may also downgrade the

company if its revenues and profitability slip over the next 12 months. This could occur if a

significant slowdown in Indonesia's economy or a sharp increase in interest rates reduces the

demand for properties and healthcare services, or Lippo Karawaci's execution of its property and

hospital projects is slower than expected. Our downgrade trigger is a lease-adjusted

debt-to-EBITDA ratio of more than 4.5x on a sustained basis.

Potential upside to the rating is limited for the next 12 months due to Lippo Karawaci's

aggressive debt-funded expansion and weak credit metrics for the current rating. However, we

could upgrade Lippo Karawaci if: (1) the company expands its business scale and diversity; (2)

it improves the income contributions from stable and less cyclical businesses such as

healthcare, property leasing, and property management; and (3) it adopts a more conservative

financial policy.

Related Criteria And Research

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List

Ratings Affirmed

PT Lippo Karawaci Tbk.

Corporate Credit Rating BB-/Stable/--

ASEAN Rating Scale axBB+/--

Sigma Capital Pte Ltd.

Senior Unsecured BB-

Theta Capital Pte Ltd.

Senior Unsecured BB-

New Rating

Theta Capital Pte Ltd.

Senior Unsecured

BB-

axBB+

Source: http://news.yahoo.com/text-p-affirms-lippo-karawacis-bb-rtg-rates-123400927--sector.html

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