Good Demand For Debt Paper

CCT has this morning successfully issued $225 mln worth of convertible bonds, which on full conversion at $1.356 per unit, will lead to issuance of 169.93 mln new units, representing 5.9% of existing units. The coupon rate is 2.7%. (There is an over-allotment of $25 mln, which if fully converted, will result in the issuance of 18.44 mln new units, or 0.65% of existing issued.)

COMMENTS

1. Dilution is insignificant.

2. While 75-90% of the proceeds have been earmarked for "asset enhancement and refinancing of existing liabilities", the capital raising will give CCT the flexibility when other opportunities present themselves.

3. Note that 8 assets with asset value of $2.8 bln, out of 11 in CCT's portfolio valued at $6.1 bln, are unsecured against any borrowings.

4. We still believe the revival of earlier plan to redevelop the Market Street Car Park is a distinct possibility in the not-too-distant future, which if so, would send a strong message on what management thinks of the office market, where consensus is for a glut in the next 2 years.

5. As at end '09, CCT's gearing is a comfortable 33%: total debt of $2003.86 mln, down from $2561.6 mln a year ago, on total assets of $6100 mln. Debt would have dropped by $125 mln following the partial repayment of the Medium Term Notes due on Mar 17 '10, reducing gearing to 30.8%.

6. With yield of 6.6% based on annualized DPU for Q4 '09, and a pro-active management, we maintain BUY.

CCT raising up to $250m from convertible bonds

Most of the funds to be used for asset enhancement and debt refinancing

CAPITACOMMERCIAL Trust (CCT) is planning to raise at least $225 million and up to $250 million through a five-year convertible bond issue to be placed with institutional and accredited investors.

The office Reit, which is partly owned by CapitaLand, plans to use most of the funds (75-90 per cent) for ‘asset enhancement and refinancing of existing indebtedness’, CCT said in an SGX announcement late last night. The remaining funds will be used for general working capital.

Credit Suisse has been appointed the sole bookrunner and lead manager for the issue which is expected to close on or around April 21.

The maximum number of new units to be issued upon conversion will not exceed 10 per cent of the 2.81 billion units in issue as at Dec 31, 2009. In line with Rule 887(1)(a) of SGX-ST’s listing manual, no unitholders’ approval is required in this case.

At its full-year results briefing, CCT said that it had no plans to raise equity citing the lack of acquisition plans.

CapitaLand’s shares tanked on the announcement of its $1.1 billion convertible bond issue in August on concerns over share dilution.

In early January, the trust wrote down the value of its investment properties by $327.6 million and unveiled plans to revamp its portfolio. It said that it would sell Robinson Point to a private fund for $203.3 million and look at redeveloping Starhub Centre at Cuppage Road from an office property to a mainly residential one.

It also reported a downward revaluation of its properties from $6.03 billion in May 2009 to $5.7 billion at end-2009. The writedown follows an earlier one in May, where the value of CCT’s portfolio was reduced from $6.71 billion in December 2008.

CCT owns 11 commercial properties in Singapore, including some older properties in the Central Business District (CBD). It is believed that the funds raised could be used to redevelop Starhub Centre as well as possibly resurrect plans to redevelop the Market Street Car Park into an office development which were shelved last year due to the uncertain market outlook.

In May 2009, CCT announced plans to raise $828.3 million in a rights issue as it looked to cut down its gearing.

Prime office rents in the CBD have been falling and an upcoming glut of office supply is seen contributing to further rental erosion with analysts seeing older buildings as being particularly vulnerable. For example, in January, property firm Savills said that it expected a 20-25 per cent fall in Grade A office rents in Singapore this year.

The Grade A office supply here will rise by 47 per cent between 2010 and 2012, with 7.7 million square feet of space being added, Savills added.

CCT shares were suspended yesterday pending the announcement and remained suspended pending pricing of the bonds. On Tuesday, the stock lost one cent to close at $1.13.

No refinancing risk, implies convertible bond more for acquisitions

News

CCT announced today (17 Mar) the issue of S$225mn of Convertible Bond (CB) due in 2015, with an over-allotment option of S$25mn. This marks CCT's second CB issue following the S$370mn, 2.0% coupon in April 2008; the conversion premium on the issue was 23.9%. Pricing details of today's CB was not available at the time of this report. CCT intends to use 10%-25% of the proceeds for general working capital purposes and the remaining 75%-90% for asset enhancement initiatives (AEI) and debt refinancing. Applying the same premium of its past CB would suggest that the new CB could account for 6%-7% of current shares outstanding, under a full conversion. We estimate 2010 gearing could rise to 36% from 32%.

Analysis

Although bite-sized, we think the proceeds from CB provides financial flexibility and paves the way for long awaited acquisition(s) and/or AEIs to enhance its Office portfolio, allaying market concerns that it is losing its foothold in the Office market with the sale of Robinson Point and potential redevelopment of Starhub Centre to residential. We estimate CCT will have available cash balance of S$600mn for acquisitions post its Robinson Point sale (proceeds of S$203mn) and S$150mn MTN that is due in Mar. Further, we think with CCT's current levels of leverage, the company should be under no refinancing pressure as its S$370mn CB put option is only due in May 2011 and S$520mn CMBS only due in Sep 2011. Positive read-across for the SREIT sector, with CCT's issue following A-REIT's S$300mn issuance of Exchangeable Collateralized Securities on 15 Mar, suggesting an improving debt market that could pave the way for acquisition-led growth.

Implications

We think the CB paves the way for CCT's portfolio reconstitution strategy to further enhance asset quality. We favor discounted prime Office exposure; CCT's implied market value is S$1,460 psf, 10%-15% below recent prime grade transactions, which we think is not representative of CCT's prime portfolio. Maintain Buy and TP; CCT is trading at 0.8X '10E P/B and 6.2% '10E div yield.

Major challenge: enlarging the office portfolio

Fully-valued for recent stability and future risks

We maintain our 3 (Hold) rating for CCT, and believe the current unit price reflects fully a more stable office market, but with lingering short-term uncertainty ahead of the MBFC phaseone opening (in 2Q10) and an outlook clouded by further supply risks in 2011 and 2012. 

Leasing skills likely to be put to the test in FY10-12

The CCT manager’s industry-leading leasing skills were apparent during the most recent office-market peak, as the key buildings in CCT’s portfolio enjoyed high occupancy rates and rents. We believe these skills will be put to the test again as the incoming CBD supply would naturally draw tenants from its existing buildings. 

Our thoughts on CCT’s portfolio reconstitution

Before investors get carried away by CCT’s recent portfolio reconstitution announcements, the divestment of Robinson Pointand redevelopment potential of StarHub Centre (almost a done deal, in our opinion, but still subject to approval from other government authorities), we believe it would be critical from a recurrent-income perspective for CCT to be able to swap these assets for investment-grade office assets. With cap rates for Singapore offices starting to narrow, we do not believe it would be easy for CCT to acquire assets in a DPU-accretive manner. We believe potential acquisitions could even be put on hold to facilitate potential debt refinancing for FY11 (when the put option on its S$370m convertible bond could be exercised in May and a S$520m CMBS for Raffles City would be due in September). 

DPU forecasts revised down by 0.7-9.0%

We have revised down our DPU forecast by 9.0% to 6.76¢ for FY10. We had assumed (erroneously) that the estimated divestment gain of about S$19m from the disposal of Robinson Point would be distributed to unitholders. The manager has clarified that the proceeds from the disposal would be retained for financial flexibility. Our DPU-forecast revisions for FY11 and FY12 are negligible. 

Six-month target-price raised to S$1.19 (from S$1.17)

We have raised our six-month target price, based on parity to our RNG valuation method (a finite-life Gordon Growth model), to S$1.19 from S$1.17, after lowering our (long-term) cost-of-debt assumption to 4.0% from 4.2%. Our core operating income estimate assumes average (monthly) passing rents of S$6.50 for Capital Tower, S$10.00 for Six Battery Road, and S$9.00 for 1 George Street.

Working towards refinancing

Tapping on the MTN market. Recently, CapitaCommercial Trust (CCT) issued S$70m of fixed rate notes under its S$1bn Multicurrency Medium Term Note (MTN) Programme and proceeds will be used for repayment of borrowings and working capital purposes. At the same time, CCT also announced that it had repurchased an aggregate principal amount of S$15m of its convertible bonds (CB) that mature in 2013. This is part of the effort to prepare for its refinancing requirement in 2011 as the CB holders have a put option exercisable in May 2011 that would require CCT to redeem the CB. The CB is currently deep out-of-the-money (conversion price of S$1.8349) and the possibility of share price reaching the conversion price by May 2011 seems low. We expect CB holders to exercise the put option next year, which would bring forward the maturity of the CB. 

Higher average cost of debt expected. In comparison to other recent MTN issues, interest rate secured by CCT is on the high side among the MTNs with 5-year maturity (3.288%-3.64%). This came as no surprise, given the weak office sector outlook and thus the higher risk premium compensating the MTN holders. Despite the low interest rate environment, we expect average cost of debt to trend higher in 2010 as the cheaper MTN issued prior to the crisis matures this year and is refinanced by new MTNs with higher cost of debt. 

Pro-active efforts towards refinancing. While recent capital management efforts may not have significant impact, we are still encouraged by the pro-active efforts that the management took to prepare for refinancing next year. As much as S$1,010m of borrowings could be due for refinancing in 2010 (CB holders exercise put option) but unencumbered assets of S$2.6bn (after sale of Robinson Point) should provide sufficient collaterals to secure new loans for refinancing. A reconstitution of CCT’s asset portfolio may also have the positive impact of lowering its risk profile and thus, give CCT better leverage to negotiate for more attractive cost of debt going forward.

Looking for a better entry level. We maintain our estimates and keep our RNAV and fair value unchanged at S$1.16. With a projected total return of 8.4%, we maintain our HOLD rating on CCT. Potential share price catalyst could come from the outcome of the review for Starhub Centre and acquisitions. S$1.05-S$1.10 would be good entry level for accumulation, which would translate to a potential total return of 11.3%-16.6%.