Singapore Bonds Face Contagion Fears From Lippo Probe

(Bloomberg) -- An investigation into troubled Indonesian property developer PT Lippo Karawaci, controlled by Southeast Asia’s billionaire Riady family, is reverberating in the Singapore bond market.

Singapore dollar-denominated notes issued by First Real Estate Investment Trust, and those sold by OUE Ltd., controlled by the family, have dropped as a liquidity crunch prompts concern the group is using other entities to help shore up finances. Bonds of Lippo Malls Indonesia Retail Trust, also sponsored by Lippo Karawaci, have come under pressure as well.

The entities’ bonds have sold off “likely due to contagion effect,” according to Wong Hong Wei, a credit research analyst at Oversea-Chinese Banking Corp. “With the weakening credit profile at Lippo Karawaci, which is under probe, First REIT and Lippo Malls are negatively impacted,” he said.

There are concerns that various Lippo entities are making acquisitions to help out Lippo Karawaci, according to Singapore-based Wong. Last month, Lippo Karawaci sold its holding in First REIT’s management company to OUE and OUE Lippo Healthcare, in addition to the sale of a partial stake in First REIT to OUE Lippo Healthcare Ltd.

First Reit gets 82.4 percent of its rental income from Lippo Karawaci and its subsidiaries, according to its 2017 annual report. The Indonesian developer has taken “active steps to manage their liquidity and balance sheet position,” according to an email from an external spokeswoman for First Reit. Rents have still been paid, despite recent delays of one to two months, she said.

For Lippo Malls, Lippo Karawaci contributes only 10 percent to its revenue, according to a external spokeswoman. Non-related parties contribute 66.7 percent of its total gross revenue, she added.

Lippo Karawaci did not immediately respond to requests for comment.

Bribery Probe

The real-estate company was cut by Fitch Ratings Ltd. to CCC+ from BB- this month on weakening cash flow from property development. Lippo Karawaci has been under pressure due to a bribery inquiry, with the home of Lippo Group’s deputy chairman James Riady searched by anti-graft officials last month.

Although Lippo Group is owned by the same family, its geographical separation between two brothers was a deliberate move to minimize family conflict, an OUE representative said in an email. The representative noted that James Riady controls all business in Indonesia while his brother Stephen Riady controls OUE. “In our view, there is no impact on OUE’s bonds.”

The acquisition of the stakes in First Reit and its manager were part of OUE’s strategy to grow, and were done at attractive valuations, the representative said.

“For large groups, if there is bad news at one entity level, the first reaction in the bond market is to sell all the related party bonds as well,” said Rahul Banerjee, founder of Singapore-based BondE, a fintech firm that focuses on Asian credit markets.

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