AllCo – UOBKH
Triple Witching
Allco Commercial REIT invests in real estate in the office and retail sectors. It owns a portfolio of high quality commercial properties in Singapore, Australia and Japan. Allco Commercial is managed by Allco (Singapore) Limited, a subsidiary within Allco Finance Group (AFG).
Collateral damage from Allco Finance Group. Two margin lenders to Allco Principals Investments (API), Tricom Equities and National Australian Bank, have sold 21.9m AFG shares on 23 Jan 08. API is a substantial shareholder at AFG and has reduced its stake in AFG from 13.2% to 6.5% due to the margin selling. API is currently in a dispute with Tricom Equities involving procedures surrounding the margin call. The heavy wave of selling resulted in a 42.8% plunge in AFG’s share price in Jan 08.
AFG is an integrated financial services group providing in asset origination, funds creation and funds management. It specialises in structured asset finance, funds management and debt funding activities, principally in aviation, property, rail, shipping, small ticket equipment, infrastructure and financial assets. AFG is highly leveraged with total debt/equity ratio at 2.81x at Jun 07. It has loan assets of A$4b compared to shareholders’ fund of only A$2.2b. AFG has a 15.8% stake in Allco Commercial REIT.
Downgrade by Moody’s. Moody’s Investors Service has downgraded Allco Commercial REIT’s corporate family rating one level from Baa3 to Ba1 on 31 Jan 08. Moody’s has also placed the rating on review. Ba1 is a speculative grade (junk status). Allco Commercial REIT’s gearing ratio is 47% at Dec 07. The downgrade by Moody’s raises the possibility that Allco Commercial REIT may have to issue new units via placement or rights issue to reduce gearing to below 35%, even at current depressed share price. The company has previously decided not to proceed with a non-renounceable preferential offering of up to 175.2m new units in Nov 07 due to poor market conditions.
Reliance on short-term borrowings. Allco REIT has total borrowings of S$882.2m, of which a substantial S$615.9m has to be repaid within a year. The company could face difficulty in raising funds due to turmoil in the credit market and the rating downgrade by Moody’s. Cost of borrowings is likely to increase, which will have an adverse impact on earnings growth.
Allco Commercial REIT has corrected 22.4% YTD. The company declared DPU of 2.21 cents for 4Q07. This represents annualised distribution yield of 12.7%. Annualised distribution yield for CapitaCommercial, K-REIT Asia and Suntec REIT are much lower at 4.4%, 6.2% and 7.5% respectively.