Indonesia Billionaire's Builder Joins Top Asia Junk Bonds

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A builder controlled by Indonesia’s billionaire Riady family has rebounded from the depths of distress to become one of the best performers in the Asia junk dollar bond market.

The turnaround by Lippo Karawaci, among Indonesia’s biggest developers, comes after moves to raise cash to pay down debt, and dovetails with two broader themes.

Sentiment toward developers is improving as Indonesian president Joko Widodo is on course to be re-elected with a comfortable majority, fueling expectations he will push ahead with an ambitious infrastructure program. Meanwhile, a rally in emerging market assets and a stabilized rupiah are also helping the country’s riskier borrowers refinance their debt.

Indonesia Billionaire's Builder Joins Top Asia Junk Bonds

Lippo Karawaci said in March that it will raise $730 million through a rights issue of shares that has attracted high-profile investors including former Goldman Sachs Group Inc. investment banker Raymond Zage and Hong Kong’s Chow Tai Fook. The Indonesian company already improved its cash position in the first quarter by securing a portion of those funds, with the injection of $280 million through an advanced subscription by its controlling shareholder.

The builder will raise another $280 million by selling some healthcare assets and a shopping mall.

The company has also shaken up its management, with John Riady, grandson of group founder Mochtar Riady, taking the reins over from his father, who was probed last year.

“There is sufficient capital to address Lippo Karawaci’s debt obligations, so it now comes down to its execution of projects and the company’s ability to generate a healthy operating cash flow,” said Dhiraj Bajaj, a Singapore-based money manager at Lombard Odier (Singapore) Ltd. His firm holds dollar bonds due 2022 and 2026.

Lippo Karawaci plans to deploy the cash raised from the funding exercise to delever its balance sheet and provide a liquidity buffer for all debt interest payments through the end of 2020. It also plans to invest as much as $200 million to develop Meikarta, its flagship $18 billion township project near Jakarta, which has raised some concern.

“Given their willingness to continue investing heavily in their Meikarta development, it’s unlikely they would generate enough operating cash flows to redeem their bonds and may therefore need to have willing creditors that accept terming maturities further out,” said Xavier Jean, analyst at S&P Global Ratings.

PT Lippo Karawaci’s bonds due in 2022 and 2026 are the second and third best performing junk dollar bonds in Asia outside Japan this year, having gained 24.6 cents and 22.7 cents in the period, according to Bloomberg-compiled data.

In an earnings announcement dated April 30, CEO Riady said that the company hopes to finalize its rights issue in the coming months and “more aggressively pay down bonds and bank loans while expediting the completion of existing projects.”

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