Indonesian Giant Lippo May Face Debt Crisis

The developer of the Meikarta megaproject owned by the Indonesian conglomerate Lippo Group faces a lawsuit over arrears of tens of billions of rupiah in advertising costs, raising concerns over the sprawling group’s overall viability and concurrent fears that if a corporate entity like Lippo were to capsize, it could have a knock-on effect on an already-fragile economy.

In an indication of the heightened concern, Moody's Investor Service on June 1 cut its rating from B1 to B2 on a PT Lippo Karawaci TBK private placement, highlighting liquidity problems facing some group companies – particularly those in the property and retail business sectors – In terms of repayment capability, and assigned a negative outlook.

Headed by the octogenarian tycoon Mochtar Riady, whose wealth is estimated by Forbes at US$3 billion, Lippo’s assets include property, retail, health, media, and education. In the property business sector, Lippo Group owns the holding company of Lippo Karawaci, which builds and manages residential dwellings, hospitals, malls, hotels and deals in asset management.

The conglomerate, however, may have bitten off too much in its Meikarta development, a huge new city on the outskirts of Jakarta being built from scratch and projected ultimately to house up to 8 million people at a whopping cost of more than US$21 billion. The developer, PT Mahkota Sentosa Utama (MSU), a Lippo subsidiary, poured more than Rp1.5 trillion (US$107.65 million) into advertising throughout 2017, leading Indonesian companies in ad spending for the year according to Nielsen ratings. The project has 19 global partners.

On its official website, Meikarta is called "a truly integrated city of the future," not only redefining what a modern city should look like and feel like but said by the developer to set a new standard for a world city in Southeast Asia and beyond.

It is a grandiose plan that, according to the Worldbuild365 construction products firm, is to include 10 five-star international hotels, seven malls and commercial retail spaces covering a total area of 1.5 million sqm, an international financial, industrial research and exhibition centers and what is being dubbed “Indonesia’s Silicon Valley.”

For several months the Meikarta advertising and promotional blitz was everywhere in Jakarta. Malls, especially those owned by Lippo but also others, were awash with young people handing out brochures and ushering prospective buyers into showrooms to peddle apartments. Television, the internet and newspapers carried the Meikarta message that life as we know was about to be transformed. Billboards, banners and signage touting Meikarta dominated the middle-class shopping enclaves of the city. Lippo executives confidently said that sales targets were through the roof and that the massive development was a guaranteed success. Then it all stopped. Lately there has been virtually no sign that Meikarta exists. It simply vanished from public view.

But the public recently was shocked by the lawsuit, filed by PT Relys Trans Logistic (RTL) and PT Imperia Cipta Kreasi (ICK), two of MSU's partners in creating and marketing Meikarta ads. The lawsuit was filed on May 24 in a Jakarta District Court using a mechanism against debtors deemed unable to continue to pay their creditors. The process is an attempt to reach an agreement between debtors and creditors without forcing the debtor into bankruptcy, a loose equivalent of the US’s Chapter 11 under which debtors are allowed to reorganize and reschedule their payments over time.

The plaintiff's attorney, Tommy Sihotang, said his two clients filed because the Meikarta developer hasn’t paid. "It's hard to believe that (managers) of a project worth Rp278 trillion don’t pay advertising bills." He didn’t attempt to calculate MSU's debt, but said it is in the tens of billions of rupiah, adding that while MSU initially paid its bills, recently it stopped. A summons to immediately pay met no response. MSU, Sihotang said, is believed to be facing internal problems. In addition to these two clients, Sihotang said, other creditors who will charge advertising fees. "If this lawsuit has been decided, another creditor will appear and we have prepared another creditor (lawsuit)," he said.

The hearing on the suit was supposed to be held on June 5 but has been postponed to June 28 because MSU has not provided a lawyer, officials said.

Communication Director of MSU Danang Kemayan Jati denied MSU owes anything to the vendors, saying the firm has so far paid them Rp13 billion. The rest, he said, hasn’t been paid because it is still in the audit process. "We never said we wouldn’t pay the debt to them, and some of the payments were awaiting the results of the internal audit because of findings of irregularities from the bills received."

PT Relys Trans Logistic (RTL) is a freight logistics company but is acting as an event organizer (EO). Hence, Danang said, there may have been a fraud in the process of granting work to RTL. "This…request is in a hurry and the applicant is impatient," he said. Danang accused both vendors of providing unauthorized evidence in filing their bills to MSU. However, he said, his side will follow the legal process and prove the truth of its case. In fact, he said, MSU plans to sue RTL for fraud.

Meikarta facing negative issues

Nonetheless, prior to the advent of the legal action, construction on Meikarta had actually stopped. Lippo Group has sold off some of its 50 percent shareholding in Meikarta to investors, the company hasn’t paid for marketing, and unnamed Chinese investors are said to have pulled out, charging that unit sales haven‘t met targets. These problems sparked speculation about the financial condition of the Lippo Group itself.

The Indonesia Stock Exchange (IDX) has asked Lippo Karawaci for an explanation. Meikarta President Director Kitt Budi Widjaya declined to disclose the contents of a closed-door meeting with the exchange to journalists, but he assured them that the Meikarta project is continuing. He projected that Lippo Group's 2018 property sales will reach Rp10 trillion, of which 80 percent will be derived from Meikarta sales.

Moody's Investor Service, however, on June 1 cut its rating on the private placement, saying that property and retail businesses face a liquidity crunch.

"Lippo Karachi’s B2 corporate family rating reflects volatile operating cash flow generation at the holding company level that is reliant on asset sales, which are in turn subject to delays and market conditions," said Moody's in its report. "The rating outlook is negative, reflecting uncertainty around the execution of Lippo Karawaci's asset sales, which can result in further deterioration of the holding company's liquidity over the next 12-18 months," it added.

The Singapore-based rating agency said the outlook could return to stable if Lippo Karawaci executes its asset sales which would allow operating cash flow at the holding company level to cover its interest payments; and there is sufficient cash at the holding company level to meet debt repayment over the next 12 months.

However, Lippo Karawaci's ratings could be downgraded if the company is unable to address its refinancing risk in a timely manner and if there is a delay or inability to execute asset sales, such that operating cash flow at the holding company level is insufficient to cover interest payments.

Lippo observers have been reminded of a more modest development, Kemang Village in South Jakarta. The several posh towers in Kemang village were heavily pushed, with claims that a five-star Marriott hotel would be among the amenities. The hotel never appeared despite signs proclaiming it would open soon. Residents of the development complain that many promised features – like an urban golf course – have yet to be built. The mall attached to the project, which opened several years ago, has lost a number of anchor tenants, which have been replaced by Lippo retail outlets.

It is not an inspiring story. It is not a total bust, the towers are largely built and many occupied but what was once hailed by the developer as the transformation of South Jakarta is really just another apartment complex.