High debt burden worsens the depreciation of revenue and net income in a number of companies. As a result, the ability to pay debts through the results of operating income is getting weaker.
Indicator that can be used is debt to earnings before interest, taxes, depreciation, and amortization (debt/EBITDA) ratio. It measures the ability of the company to settle its debt. The higher the debt/EBITDA ratio, the greater the company burden to fulfil its liability.
Three Lippo Group companies bear a large debt burden with a high ratio. LPKR has the biggest debt with a value of Rp 13.8 trillion and debt/EBITDA ratio of 7.32 times. This means the debt burden borne by the company is 7.3 times greater than the profit.
This ratio continued to increase in the past four years, with the lowest ratio of 2.6 times in 2014.
With losses suffered by MLPL and MPPA, the two companies still have to bear the high debt burden of Rp 5.2 trillion and Rp 1.4 trillion, respectively. As a consequence, the debt ratio is negative: MLPL minus 4.9 times and MPPA minus 1.2 times. This will make it more difficult for them to settle their debts.
Probability of Bankruptcy
In general, worsening financial conditions and large debt burdens bring difficulties to Lippo Group companies in liquidity both short and medium term. In the end, this threatens business sustainability.
Altman Z-score is often used to predict bankruptcy of a company. Z-score below 1.8 indicates a very high probability of bankruptcy, while Z-score above 3 indicates a very low probability of bankruptcy.
Based on Katadata’s analysis on the ratio coefficient of the 2017 financial report, the Z-scores of several publicly listed companies belong to Lippo Group are lower than 1.8. Lippo Karawaci has a score of only 1.50, meaning its probability of bankruptcy is very high.
MPPA even recorded a Z-score of 1.44, while MLPL noted 0.89. LPCK has a score of 1.78, slightly below the threshold. In contrast, SILO and LPPF noted strong scores of 8.53 and 10.44, respectively.
However, this does not necessarily mean that those companies will collapse. For LPKR, Moody’s estimates the alleged bribery case has a limited impact on Lippo Karawaci’s finances, which is the parent company in the property sector.
Lippo Karawaci’s B3 rating and negative outlook given by Moody’s last September were not affected by this condition. The reason is that it does not take into account the additional cash flows from the Meikarta project and Lippo Cikarang.
On 18 September, LPKR announced the sale of its shares in Bowsprit to OUE Limited and OUE Lippo Healthcare Limited (OUELH). Bowsprit is the manager of Real Estate Investment Trust (REIT) worth Sing$ 202 million (Rp 2.18 trillion), with a number of buildings, such as Life Tower and Berita Satu Plaza in Jakarta, as its basic assets.
OUE took over 40 percent stake in Bowsprit Capital Corporation Limited worth Sing$ 99 million. OLH Healthcare Investments Pte Ltd, a subsidiary of OUELH, also acquired 10.6 percent ownership of First Reit from Bridgewater International Limited, with a transaction value of S$ 103 million. Bridgewater is an indirect subsidiary of LPKR.
According to LPKR President Director Ketut Budi Wijaya, the takeover process is expected to be completed by the end of November 2018. Once completed, the company’s First REIT ownership will decrease to 10.6 percent from 28.2 percent. LPKR’s liquidity will increase with the sale of these shares.
In his official statement, Lippo Karawaci Vice President of Head of Corporate Communication Danang Kemayan Jati said Lippo Karawaci was unhappy with the decisions to downgrade the company’s rating because its fundamentals have not changed much.
However, LPKR is committed to cooperating with rating agencies and responding to their constructive criticism. LPKR also confirmed its commitment to strengthening the company’s liquidity and strengthening its balance sheet to regain its previous rating with a stable outlook.
Despite its worrying liquidity, Moody’s sees Matahari Putra Prima always succeeded in renewing loan when it is due. In January, it extended the maturity of a loan from Bank of China (Hong Kong) Ltd worth Rp 300 billion to January 2019.