Lippo Karawaci Tbk
Part II - Legal Analysis: Declining EBITDA, Increasing Debt, Asset Disposals Limits Lippo’s Debt Capacity, Certain Payments Under Restrictive Covenants
Wed 11/28/2018 02:15 AM
Relevant Documents:
Part I
Tear Sheet on Reorg Data Page
9.635% Senior Notes due 2020
Lippo Karawaci’s continuing trend of declining EBITDA and increasing debt, coupled with an aggressive asset disposal programme has resulted in a 6.8x net leverage adjusted for FX as at September 2018. These conditions will reduce Lippo’s capacity to incur further debt, pay dividends and make investments under the restrictive covenants set out in its $75 million 9.635% Senior Notes due March 5, 2020 (Notes).
Our legal analysis below focuses on these Notes as they represent the first of Lippo’s four outstanding offshore bonds to mature. Trading data on these notes was not available at the time of publication, however Lippo’s holding company notes - the 7% $410 million notes due 2022 were last quoted at 74.2/74.8 according to cbonds, and the Berlin Exchange quoted bids as low as 71.5.
Lippo’s Singapore incorporated SPV and offshore subsidiary Theta Capital has issued these USD denominated notes, including the $75 million 9.635% Senior Notes due March 5, 2020 (Notes). The Notes are governed by English law, are unsecured, but have the benefit of a down-stream parent guarantee from Lippo, and further upstream guarantees from PT Sentra Dwimandiri, PT Wisma Jatim Propertindo, PT Megapratama Karya Persada and PT Primakreasi Propertindo as subsidiary guarantors. The proceeds of the Notes were to be contributed to Theta Kemang Pte. Ltd. (Kemang) for the refinancing of outstanding amounts owed under a loan to parent company Lippo Karawaci provided by UBS, and the remainder for general corporate purposes.
The $75 million Notes contain a covenant suspension mechanism which would have the effect of suspending, amongst others, the restrictions set out in the indebtedness incurrence and restricted payments covenants if the Notes were rated investment grade. However, the Notes are not rated investment grade (as of September Moody’s rates them at B3). Therefore, the restrictive covenants apply.
As Reorg noted in Part I of our Lippo analysis, since the beginning of the year, Lippo lost more than 40% of its equity value and bonds traded down to about 70, with its working capital needs over last four years almost doubling its debt pile to IDR 15.4 trillion ($1.06 billion) while revenue and EBITDA growth flatlined. This has translated into 6.8x net leverage adjusted for FX loss.
Lippo’s capital structure is below:
Restrictive Covenants
In order for Lippo, Theta Capital Pte. Ltd., the subsidiary guarantors and restricted subsidiaries to incur (or acquire) further indebtedness under the Notes, they need to comply with the limitations on incurring indebtedness covenant. The covenant permits the incurrence of ‘coverage ratio’ indebtedness if a 2x Fixed Charge Coverage Ratio (FCCR) is met.
It should be noted that EBITDA for FCCR calculation is defined as following: Consolidated Net Income plus:
- Consolidated interest expense (including any capitalized interest)
- Income taxes
- Depreciation expense
The Notes also include a second hurdle that if the ‘coverage ratio’ debt is indebtedness of restricted subsidiaries or secured indebtedness, then such debt cannot exceed 15% of total assets. Regardless of meeting the FCCR, debt can be incurred if it is permitted under another carve out - discussed below.
Lippo’s declining Consolidated Net Income results in the builder basket component of the restricted payments covenant having less capacity for Lippo and its restricted subsidiaries to pay dividends or make investments. The builder basket is comprised of 50% of consolidated net income calculation (minus loss) plus: (i) the net cash proceeds from capital contributions or from an issue or sale of capital stock (ii) a reduction in the indebtedness of the Company (excluding subordinated indebtedness) reflected in the balance sheet upon a conversion or exchange for capital stock, and (iii) an amount equal to the net reduction in investments which reflects, payments of interest on indebtedness, dividends, repayment of loans to Lippo or any restricted subsidiary.
Should Lippo not have enough capacity in the builder basket, it will need to rely on the carve outs to the restricted payments covenants and in respect of investments, those actions which fall within the ‘permitted investments’ definition. Details of the restricted payments covenant are set out below. However, the transactions ceding control of Mahkota Sentosa Utama will allow the group to separate losses incurred by the struggling project from its consolidated results, which have helped to bump up Lippo’s net profits in the first half of this year. This may allow Lippo to continue to access the builder basket to facilitate payments of dividends and the making of investments.
Table below illustrates the effect of Meikarta deconsolidation.
Noteholders should also be aware that, provided no default has occurred, a carve out to the restriction on sale and leasebacks permits Lippo and any restricted subsidiaries are free to conduct any sale and leaseback transactions involving the sale of hospitals or hotels to a property trust vehicle and the lease by the property trust vehicle of such properties.
While there are no restrictions on Lippo conducting asset sales, there are parameters around the consideration received and how the proceeds received from asset sales must be applied. Lippo can use the sale proceeds to repay senior debt, invest in a replacement asset or to repay the Notes.
| Provision /Issue | Analysis |
| Limitation on Indebtedness | The Information Memorandum contains a covenant which restricts the ability of Lippo and any restricted subsidiary from incurring additional debt or issuing preferred stock. Debt incurrence by Lippo, the issuer, the restricted subsidiaries (excluding Kemang) and subsidiary guarantors is permitted provided:
Lippo and the restricted subsidiaries are not permitted to incur any disqualified stock. Permitted debt baskets include: -Basket for the incurrence of intercompany borrowings between the Lippo and designated restricted subsidiaries. -Limited permitted refinancing basket allows for refinancing indebtedness incurred (except indebtedness of an unrestricted subsidiary) under the (i) leverage ratio, (ii) outstanding indebtedness at the date of issuance, (iii) capitalized lease obligations baskets. Subject to refinancing debt being repaid within 60 days, and protections to ensure that any refinancing indebtedness incurred to redeem the Notes or other indebtedness reflects the pari passu / subordinated status of such refinanced debt and does not mature prior to the maturity of the indebtedness being refinanced. A restricted subsidiary must be a subsidiary guarantor (subject to an exemption) to access the basket. -Non-speculative hedging obligations basket in respect of indebtedness incurred by Lippo or a restricted subsidiary (excluding Kemang), covering currency exchange rate, interest rate and commodity price fluctuations. -Permitted capitalised lease obligation and acquisition financing basket in respect of Lippo or a restricted subsidiary (excluding Kemang) in the ordinary course of business incurring indebtedness (within 120 days of) to (i) purchase property (including lease / land use rights), assets or equipment through the acquisition of an entity which becomes a restricted subsidiary, (ii) the purchase price or cost of development or improvement of property (including lease / land use rights), assets or equipment to be used by Lippo or a restricted subsidiary. This is subject to such indebtedness, together with any permitted refinancing debt (excluding a contract guarantee to the extent it is included in the debt), not exceeding a $50 million cap. -Baskets for indebtedness of Lippo and any restricted subsidiaries (excluding Kemang) for ordinary course items, i.e. reimbursement of workers compensation, or a bond, surety or performance bond, letters of credit, trade guarantees, and honouring by a bank or financial institution if a cheque drawn against insufficient funds. This includes guarantees provided to Indonesia’s public utility companies. -A basket for indebtedness incurred due to the disposition of business or asset of a restricted subsidiary (excluding Kermang and any acquisition indebtedness finance), linked to indemnification, purchase price adjustment, guarantees, letters of credit, surety or performance bonds, which secure an obligation of Lippo or a restricted subsidiary (excluding Kemang). - A basket for indebtedness arising from Lippo or a restricted subsidiary (excluding Kemang) providing a guarantee to an Indonesian domestic bank or financial institution in respect of certain receivables transactions in relation to residential properties sold by Lippo or a restricted subsidiary. Subject to $50 million cap. - A debt incurrence basket for any sale and leaseback transaction in accordance with the covenant governing it. -A basket for short term working capital indebtedness of Lippo or a restricted subsidiary (excluding Kemang), subject to a one year maturity and $50 million cap. -A basket for indebtedness created by Lippo or any restricted subsidiary (excluding Kemang), providing a pre-registration mortgage guarantee. -A general basket for debt incurrence (including refinancing) basket by Lippo or any restricted subsidiary (excluding Kemang) not to exceed at any time outstanding a $25 million cap. The OM permits the reclassification of debt incurrence carve-outs. |
| Limitation on Restricted Payments | Lippo and any restricted subsidiaries are generally not permitted to declare ot pay dividends, purchase, redeem or acquire capital stock, retire, redeem or repay any debt subordinated to the Notes or any guarantees or make investments unless permitted by carve-outs to the restricted payment covenant. The restricted payments builder basket is built up by a standard 50% consolidated net income and is accessible in the absence of default plus Lippo being able to incur at least $1 of additional debt under the ratio debt test. The consolidated net income basket started accruing on July. 1, 2010, not the date of issuance of the Notes and the restricted payments are based on an aggregated amount since July. 1, 2010. The restricted payment income basket is added to by certain items including: (i) the net cash proceeds from capital contributions or from an issue or sale of capital stock (ii) a reduction in the indebtedness of the Company (excluding subordinated indebtedness) reflected in the balance sheet upon a conversion or exchange for capital stock, and (iii) an amount equal to the net reduction in investments (subject to such amounts already having been included in the calculation of consolidated net income) which reflects amongst others, payments of interest on indebtedness, dividends, repayment of loans to Lippo or any restricted subsidiary. The covenant does allow permitted payments carved out from the restriction which include (where relevant count against the builder basket): -Redemption etc. of subordinated debt of Lippo or a subsidiary guarantor using net cash proceeds (which includes proceeds from an asset sale) of or in exchange for an incurrence of permitted refinance debt. Subject to no default occurring or would occur. -Acquisition etc. of the capital stock of Lippo or a subsidiary guarantor in exchange for, or out of, net cash proceeds of a capital contribution or a substantially concurrent sale of shares of capital stock of Lippo, provided (i) such net cash proceeds are excluded from the basket calculation, (ii) no default is occurring or would occur. -The repurchase or redemption of subordinated debt of Lippo or any subsidiary guarantor in exchange for, or out of, net cash proceeds of a substantially concurrent sale of shares of capital stock of Lippo, provided (i) such net cash proceeds are excluded from the basket calculation, (ii) no default is occurring or would occur. -Dividends or distributions by a restricted subsidiary to equity shareholders on a pro rata basis. Payments are to be included in the calculation of the restricted payment income basket. Payments under this carve out can be made even if a default is occurring. -Payment of any dividends by PT Lippo Cikarang Tbk or PT Gowa Makassar Tourism Development Tbk, provided that (i) the aggregate amount of payments made for each do not exceed 50% of its respective consolidated net income in any given annual fiscal period after the issue date, (ii) the companies remain listed on the Indonesia Stock Exchange or another internationally recognized stock exchange, and (iii) no default is occurring or would occur. -General restricted payment basket in an aggregate amount not to exceed $25 million (but excludes investments) since the issue date. Payments under this carve out can be made even if a default is occurring. Restricted payments other than cash will be calculated at fair market value. Values will be at fair market value - if it exceeds $10 million a professional opinion or appraisal is required. Any restricted payment in an amount in excess of $10 million, requires a certificate provided by Lippo setting out the basis on which the restricted payment complies with the limitation on restricted payments covenant. Permitted investments that Lippo and any restricted subsidiaries can make include the following: - an investment in Lippo or a restricted subsidiary or an entity which becomes a restricted subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to Lippo or a restricted subsidiary. - temporary cash investments. - expected payroll, travel and similar advances to cover matters treated as expenses in accordance with GAAP cap of $1 million outstanding at any time. - stock, obligations or securities received in satisfaction of judgments. - an investment in an unrestricted subsidiary consisting solely of an investment in another unrestricted subsidiary. - an investment pursuant to an ordinary course non-speculative hedging obligation in respect of fluctuations in interest rates, foreign currency exchange rates or commodity prices. - receivables owing to Lippo or any restricted subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms. - any securities or other Investments received as consideration in, or retained in connection with, sales or other dispositions of property or assets, including asset dispositions made in compliance with the relevant covenant. - pledges or deposits (i) with respect to leases or utilities provided to third parties in the ordinary course of business or (ii) otherwise described in the definition of “Permitted Liens” or made in connection with liens permitted under the relevant covenant. -an investment pursuant to contractor guarantees by Lippo or any restricted subsidiary. -Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers. -guarantees given in accordance with the limitation on indebtedness covenant. - repurchases of Notes. - deposits made in order to comply with statutory or regulatory obligations to maintain deposits for workers, compensation claims and other purposes specified by statute or regulation from time to time in the ordinary course of a permitted business. - investments in unrestricted subsidiaries or joint ventures for and/or engaged in the permitted business, provided that when taken together with all other Investments in unrestricted subsidiaries or joint ventures, do not exceed 7.5% of total assets. -an investment pursuant to pre-registration mortgage guarantees by Lippo or any restricted subsidiary otherwise permitted herein. |
| Sale and Leaseback Transactions |
Lippo and the restricted subsidiaries are restricted from entering into sale and leaseback transactions, unless:
|
| Limitation on Asset Sales | There is a restriction on the ability of Lippo and its restricted subsidiaries to consummate any asset sale unless the consideration received is at fair market value, at least 75% is in cash or temporary cash investments or replacement assets, and no default is occurring or would occur. Following an asset sale within 360 days of receiving the proceeds from the asset sale, Lippo or a restricted subsidiary must apply the proceeds to:
There is a restriction preventing the sale or transfer of Intercompany Loans by the Issuer, Lippo or Kemang. |
| Subordination | Noteholders are unsecured and subordinated to claims of secured creditors. The Bank debt is secured over material assets. Noteholders are creditors of the Issuer and the subsidiary guarantors. Noteholders do not have a claim over the other Subsidiaries. Only four Subsidiaries are providing Guarantees. The Issuer only has an equity claim over the non-guarantor subsidiaries. The equity claim ranks behind the claim of creditors at the subsidiary level and is therefore subordinated. |
| Events of Default | The events of default under the Notes include: -Non-payment of interest - 30 day grace period; -Non-payment of principal; -Breach of covenants - 30 day grace period if subject to remedy. Written notice provided to the issuer etc. by Trustee or Holders of at least 25% of the principal amount of notes then outstanding; -Change of Control; -Cross Acceleration on debt above $15 million which has become due and payable and not satisfied; and -Insolvency and/or restructuring, moratorium, Creditor’s process. |
| Acceleration and Enforcement | Acceleration: Automatic acceleration upon a default in relation to an insolvency event or failure to make good an unsatisfied judgment (de minimis amount of $15 million and 30 day grace period applies to unsatisfied judgments). Upon an Event of Default, the Trustee can in its discretion, and if so requested in writing by the holders representing at least 25% in principal amount of the Notes then outstanding, or if so directed by an Extraordinary Resolution (quorum of two or more persons holding or representing over 66 2/3% in principal amount of the Notes then outstanding), shall (subject to the Trustee being indemnified and/or secured) give written notice to the Issuer and the Company declaring the Notes to be immediately due and payable. Enforcement: The Trustee may, at its discretion, institute proceedings to enforce terms of the Trust Deed and the Notes. However, the Trustee is not bound to take action unless (a) requested in writing by the holders of not less than 25% in principal amount of the Notes then outstanding, or shall have been so directed by an Extraordinary Resolution of the Noteholders (quorum of two or more persons holding or representing over 66 2/3% in principal amount of the Notes then outstanding), and (b) has been indemnified and/or secured. Noteholders cannot proceed directly against the Issuer, the Company or any Subsidiary Guarantor unless the Trustee, having been instructed, fails to do so within a reasonable period and such failure continues. |
| Equity Claw | 35% prior to June. 5, 2019. |
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