CCT – DMG
Refinancing Fog Cleared
Near-term refinancing fog cleared. CapitaCommercial Trust (CCT) has secured a 3-yr term loan of S$580m from DBS, UOB, Standard Chartered and Bank of Tokyo-Mitsubishi UFJ to fully refinance its S$580m CMBS (a 5-yr & 4-tranche loan issued in Mar 04) due in Mar 09. Following this successful refinancing exercise, CCT’s next major loans will be due in 2010 (S$885m) and 2011 (S$633m). We reckon the remaining ST Loan of S$76m due this year should not pose too much of a problem, given CCT’s 3Q08 cash position of S$72.4m.
Higher funding costs implied. Including this club loan, CCT’s latest all-in cost of debt is estimated to fall well within 4.4%, which is 80 bps higher than its current 3.6%. However, we note that it is still reasonably more attractive than the 6.6% Cambridge Industrial Trust obtained a month ago for its S$390m refinancing facility. Given the ongoing credit squeeze, we are not surprised by the widening spreads, which have ranged between 200 – 400 bps since 2H08. Through a weighted average method of CCT’s current outstanding loans and interest rates, we estimate the club loan’s effective cost of debt to be in the range of 3.6 – 4.9%. Taking the 5-yr SOR (which has been quoted at an average of ~ 2% for the past one month) as the base rate, this implies a credit spread of 160 – 290 bps.
But positive news nonetheless, for CCT and S-REITs. As this term loan will only need to be secured by a single property (Capital Tower) as compared to seven for the CMBS, CCT now has S$2.8b worth of unencumbered assets, thus ratcheting up its financial flexibility in capital and balance sheet management. More importantly, we conjecture that this is very positive news for the S-REITs sector, as it goes to show that credit is still available (albeit at higher costs) if needed, provided the REIT has quality assets, a strong sponsor, good track record and management. Further, we draw comfort from the fact that capital raising has taken the form of straight debt instead of equity issuance, which could bring about potential dilutive effects.
Redevelopment of Market Street Car Park shelved. Given the credit squeeze and the importance of capital preservation, we side with management’s decision to shelve the redevelopment of Market Street Car Park into a commercial building. From our view, other viable reasons could be the uncertainty on the demand front given the global macroeconomic slowdown, coupled with the substantial supply of office space coming onstream in 2010 – 11.
Maintain NEUTRAL at lower target price of S$1.05. In our opinion, the apparent availability of credit would serve to reinvigorate investors’ sagging belief in the credit-dependent REIT model, at the same time assuaging their concerns over possible recapitalisation through other avenues such as distressed asset sales and rights offerings. For CCT, while we cannot deny the positive impact from the successful refinancing, we hold the view that in the near term, its performance will be vulnerable to the macroeconomic weakness given its direct proxy to the weakening domestic office sector. Our FY09 – 10 DPU estimates have now edged down by 3.2 – 6.3% to 10.86¢ (previously 11.60¢) and 11.07¢ (previously 11.44¢) respectively, in light of assuming a higher all-in funding costs of 4.4% (previously 4.0 – 4.2%). That say, the all-in funding cost could still edge lower as the interest cost for its S$650m term loan would be re-fixed in Jan 09. As such, we are lowering our DDM-pegged target price for CCT to S$1.05 (previously S$1.08), with cost of equity at 10.0%. Maintain NEUTRAL.