Month: December 2008
CMT – OCBC
Uncertainties over refinancing and rental rate outlook
Refinancing is still our focus for 2009. Going into 2009, refinancing of borrowings will remain the overhanging concern for CMT. CMT had not done any refinancing in 3Q08, but management assured that there is sufficient cash and bank facilities to refinance its borrowings due in December 08 (S$187.5m) and May 09 (S$80m). While previously we had assumed that part of the borrowings be refinanced by the medium term notes (MTN) programme, there is now little investor appetite for MTN, meaning that CMT would not be able to draw down its untapped MTN facility for refinancing.
Credit rating could be at risk. Recent spate of downgrading of S-REITs’ credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody’s confirmed CMT’s A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT’s cost of refinancing and affect its future distributions.
Cautious over retail outlook. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. To reflect this, we have already taken a more conservative stance in our retail rental rate expectations and expect annual decline of 5% in rental rates for FY09 and FY10.
Maintain BUY. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. Earlier, we have also already factored in an increase in borrowing costs of +100bp for FY09 in anticipation of higher borrowing cost due to the tight credit market. We are expecting a FY09 DPU of 15.1 S-cents which translates into a yield of 9.4%. Based on a 15% discount to our RNAV forecast, we are maintaining our fair value of S$1.94 for CMT. As upside to share price is still 21.4%, we keep our BUY rating on CMT.
REITs – OCBC
Perceived risk will drive performance
The growth story is unwinding. Since its establishment in 2002, the SREIT sector has flown on the back of a soaring property market. Portfolio sizes expanded on the back of acquisitions and revaluation gains. Unit prices had also followed suit. The REITs behaved like growth instruments – the focus was on capital appreciation, not yield. This golden era ended quite decidedly this year. The growth story, built on a bull market (rising asset prices) and a cheap market (easy credit), has seen a massive reversal. No thanks to a collapse in unit prices, the sector is now trading at an average 20% trailing yield and a 63% discount to book.
Perceived risk new driver. We believe the sector’s performance will be driven by perceived risk, as measured by the strength of their balance sheets and the quality of their underlying income. Based on reported data, some S$4.4b of debt is due for refinancing in the next nine months until September 2009. Refinancing poses a major challenge for the sector, especially with securitized financing no longer in play and lenders mindful of loan-to-value in a falling market. We feel revaluation losses have a high probability of breaching self-imposed and lender-preferred gearing targets. An equity recapitalization may be necessary. In the midst of such uncertainty, we believe sponsored REITs are likely to show outperformance. On the income side, earnings and distributions are threatened by a rising cost of capital and potential rental declines. Our view is that REITs may benefit from diversification, but will have to watch out for forex-driven revaluation risk.
Recommendations. We have a NEUTRAL rating on the sector. We generally think S-REITs are oversold. As capital appreciation-seekers abandon the sector en masse, we see a new ‘REIT as value’ story emerging. While we expect share price volatility to continue for these institutional favorites, value hunters have an opportunity to selectively pick up some good assets at what we think are really good valuations. We expect substantial declines in capital values and rentals in the office sector – but to a large extent unit prices already reflect these concerns. The impact of global events on the retail and industrial sectors has been slower to register in market consciousness. The industrial sector is quite leveraged as a whole and it may be too early to make the call that risks are fully priced in. Within our coverage universe, we have BUY ratings on Suntec REIT (fair value: S$0.90), CapitaMall Trust (fair value: S$1.94) and LMIR Trust (fair value: S$0.39).
Cambridge – Nomura
First look
Following its announcement of a new CEO, Cambridge announced after market close it had agreed to the terms of a 3-year syndicated loan to refinance all existing debt facilities. While the eventual cost is higher than our expectation, it is far lower than the market was pricing in prior to the announcement. This development should allay much of the refinancing concern over the S-REITs. Pending drawdown of this loan, we keep our DPU forecasts and other assumptions unchanged.
Refinancing at higher cost, but risk largely abated
Ricmkers – OCBC
US$1.1b order book is a burden
US$1.1b order book. In November, Rickmers Maritime (RMT) took delivery of its 13th vessel, MOL Delight for US$72m. We estimate its gearing will increase to 1.4x by the end of the year from 1.1x debt-to-equity as at 30th September. RMT expects to take delivery of 10 more vessels costing over US$1.1b from now to 2010 (with the charters and charter rates already locked in). RMT has credit facilities in place for the next six ships worth US$420m.
High leverage has a high price. Despite an aggressive acquisition program, RMT has been able to defer raising more equity by ramping up gearing in the near term. This increased leverage comes at a price. Consequently, the trust’s debt repayment requirements have accelerated and certain loan tranches have only 1-2 years maturities. We estimate that if RMT continues on its current ‘debt-first’ trajectory, it would have to repay around US$17.9m of debt in FY09 and another US$157m in FY10. Our estimates suggest that even if RMT diverted 100% of its cash income to pay off debt, it would not be enough to service the FY10 dues. An equity issue will be necessary.
At what price, equity? We also note that credit facilities for the US$711.6m vessels due in FY10 have not been arranged yet. We believe the market value of those vessels would have taken a hit versus the asset cost pre-fixed by RMT. So even if lenders provide 100% loan-to-market value, it would not cover the cost of the vessel. We expect the terms on those facilities to be even more stringent, and expect fresh equity will again be needed to fund the FY10 vessels. In total, we estimate that RMT needs around US$600m in fresh equity, at least, over the next two or three years. At current price levels, any issue would be highly dilutive to existing unitholders.
Unappetizing risk-reward ratio. We believe order book concerns will define 2009 for RMT. Worst case solutions to ‘disappear’ the order book include an outright vessel sale, a sale-and-leaseback or a sponsor “bailout” (equity or asset warehouse). We expect any such resolution to be a positive catalyst for RMT’s share price, and the best case scenario for unitholders. Another major concern is the potential breach of the loan-tomarket value covenant on existing loans. The outcome of any breach will depend on the continuing strength of RMT’s blue chip charterers and the health and risk appetite of its lenders. Maintain HOLD with S$0.40 fair value.
PST – OCBC
Rights issue over and done with
Preferential offering completed in 3Q. Pacific Shipping Trust (PST) raised about US$92.3m in gross proceeds from its preferential offering (PO) in 3Q08. The offering was on the basis of three new units for every four existing units. The issue price of 36.5 US cents per new unit was at an 18.9% discount to PST’s IPO price of 45 US cents. Sponsor Pacific International Lines (PIL) had agreed to subscribe for both its pro-rated shares as well as any unsubscribed units. Approximately 57.2% of the new units were unsubscribed, and PIL has subsequently seen its stake in PST increase from 34.64% to 59.2% after the partial equity “bail-out”.
Stronger balance sheet post PO. The PO proceeds are being used to finance and refinance the four new vessels costing US$222.2m slated for acquisition in 2008: Kota Nabil (delivered in March); Kota Naga (May); CSAV Laja (mid-September); and CSAV Lauca (mid-November). Fully debtfunded, the 2008 acquisitions would have bumped PST’s debt-to-equity up to more than 2x by year end. As of 30 September, PST is geared at 0.8x debt-to-equity. Its portfolio now consists of ten vessels, with a total asset investment of about US$493m. PST has no near-term debt expiry and a conservative loan repayment structure.
No LTV covenant. PST is the only Singapore-listed shipping trust without a loan-to-market value covenant on its loan documents. This means that there is no risk of a technical default because of falling asset values. This puts PST in a better position to ride out the shipping cycle than the other two trusts. While PST has no further capital commitments (unlike Rickmers Maritime), it has not suspended its yearly acquisition target either. The trustee-manager indicated in the 3Q release that they would continue to be on the look-out for “yield-accretive growth opportunities”. In addition, PST has received unitholder approval to expand its investment mandate beyond containerships.
Proxy for PIL. PST is the only shipping trust to have completed an equity issue since listing. This issue has come at the price of a smaller free float but demonstrates the willingness of PST’s sponsor to support its trust. Charters to PIL, a top 20 liner company , account for about 70% of PST’s annual revenue. In essence, the risk quantum for PST has become a proxy for the risk of the parent company. PST’s share price has fallen 68% over 2008. It is currently trading at a 32% trailing yield.