Lippo struggle: ominous omen for Asian high yield?

Indonesian property developer is believed to have pulled its liability management exercise as volatile markets get the better of it.
Indonesian high yield, looking less healthy
Indonesian high yield, looking less healthy

Indonesian property developer Lippo Karawaci is believed to have pulled its liability management exercise on Wednesday after volatile markets made it impossible to achieve its size and pricing targets. 

The company and its lead managers have yet to confirm the demise of an exchange offering for the group's 2019 notes and a concurrent new 2023 bond offering. But a number of non-syndicate bankers, fixed-income analysts and investors said company insiders told them of its postponement early on Wednesday. 

The news, if confirmed, will not come as much as a surprise to the wider market since the deal had clearly been struggling after the syndicate increased the potential coupon on the new issue from 8.75% to 9% and boosted the take-out price for the 2019 notes to encourage more bondholders to tender their bonds.  

The Ba3/BB-/BB- group originally launched the consent solicitation and exchange offer on January 18 in the hope of extending the maturity profile of its dollar-denominated debt and improving its cash flow. However, it could hardly have picked a worse time for the exercise given the increasing volatility, which has buffeted global credit markets over the past few weeks. 

"It's not really the borrower's fault. When they made the decision to do this a couple of months ago they weren't to know how volatile the credit markets would turn out to be. January and February are normally very good months to issue debt," Lucror Analytics credit analyst Trung Nguyen told FinanceAsia.

Trung added that the cancellation would be a disappointment for Lippo but not a crushing blow for its balance sheet. "They still have a few years before these bonds mature so they can always come back again when they'll hopefully not be forced to pay such a high premium because markets are bad."

The bond offering in question concerns a $250 million 7% May 2019 issue in the name of Theta Capital with a guarantee from Jakarta-listed Lippo Karawaci. 

Bondholders who participated by the early bird deadline of January 29 stood to receive 102.25% for their existing bonds and an equivalent allocation in a new 2023 issue, which was initially marketed at the 8.75% level. 

This new bond would also incorporate a further $100 million in new financing that Lippo hoped to use to expand its hospital business. 

At the close of the early bird deadline, the company announced that it had received acceptances of 36.75% from eligible bondholders, equating to $91.884 million of principal. 

It then tried to incentivize remaining holders of the 2019 notes by increasing the payout price if they placed bonds into the exchange by the final February 4 deadline. This was increased from 100.875% to the early bird price of 102.25%. 

On Wednesday, brokers were quoting the 2019 bonds on a bid/offer price around the 98%/99.5% level. 

The group also raised the indicative yield on the new 2023 deal to 9%. In doing so, its hand had been forced by the secondary market trading performance of its existing debt. 

When it first launched the consent and exchange solicitation its outstanding 7% April 2022 bonds were trading on a yield-to-worst of about 7.98%. However, as of February 3, brokers were quoting yields ranging from 8.3% to 8.4%, some 30bp to 40bp wider.

The new 2023 bond would have extended the maturity curve of the group's debt by another year. However, revised pricing only boosted the prospective yield by 25bp.

One banker suggested Lippo might have got the new issue away had it launched a new five-year bond rather than a seven-year.

"Investors are very skittish right now and they just don't want to move down the curve especially where lower rated double-B credits are concerned," the banker stated. 

Consent solicitation proceeds

Trung said that Lippo is still likely to be fairly happy since the consent solicitation can still proceed even if the exchange and new issue do not go ahead. This part of the liability management exercise is believed to have achieved the necessary two-thirds majority and required quorum to amend the indentures of the existing 2019 notes so they are in line with the rest of Lippo's dollar-denominated debt.

According to the offering circular, Lippo Karawaci had $838 million in debt as of end-September 2015. At that point it also had cash and equivalents of $108 million and recorded a nine-month net profit of $30.3 million.

Like most Indonesian property companies its balance sheet has been hit by a combination of weak property sales, which are denominated in rupiah, and rising debt service and re-payment costs, which are largely dollar-denominated and have ballooned in tandem with the rupiah's decline. 

Last summer, the Indonesian government sensibly restricted other property companies from accessing the international debt markets, mindful of what had happened to corporate balance sheets when a similar but more devastating set of circumstances unfolded during the Asian financial crisis.

S&P Capital data shows that the next bond the group will need to re-pay or re-finance is an October 2016 bond issued in the name of LMIRT Capital with a guarantee from Lippo Karawaci. This has $105.29 million of principal outstanding.

Earlier this month, Standard & Poor's revised the outlook on Lippo's BB- rating to negative citing delays transferring assets to Singapore-listed Lippo Malls Indonesia Retail Trust (LMIRT). The agency said the delays are weakening the group's cash flow but believes they will go ahead and provide the required buffer.

It concluded that the group's debt to Ebitda is likely to remain just below its downgrade trigger of 5x. 

Moody's noted that the group's rating is also supported by its diversified business profile, which enables its income to be well-balanced between recurring income (56.4% in the nine-months to September) and non-recurring income from its real estate development. 


Lippo Karawaci's problems do not bode well for the rest of the Indonesia high-yield universe given it is considered one of the better-positioned credits. 

With the exception of PT Cikarang Listrindo, the whole of the Indonesian high yield universe is currently trading below par. At the very bottom of the pack is Indika Energy's 6.375% 2023 bond, which was trading Wednesday on a bid/offer spread of 30%/37%.

However, Trung believes Lippo's likely demise will have minimal impact on the rest of the Asian high-yield universe. "It would be difficult for those borrowers to have accessed the debt markets anyway," he commented. "What Lippo's cancellation has shown is just how weak the market is right now." 

Dealer managers for consent solicitation plus the exchange offering and new issue are Citi, Deutsche and UBS.

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