Parentage Sure Counts

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.

Refinancing secured

S$580m refinancing secured on 3-year term loan

All-in cost of debt estimated within 4.5%. CCT announced last night that it had secured refinancing for its S$580m loan that will be due in March 2009 with a 3-year loan term. Bankers involved were DBS, Standard Chartered, United Overseas Bank and The Bank of Tokyo-Mitsubishi UFJ. Cost of debt for this refinancing was not revealed but all-in interest cost was “well within the projections assumed in CCT’s circular” on One George Street, which was 4.4% for 2009. (This assumption excludes debt taken for Raffles City which is 4.2%). We estimate all-in cost of debt within 4.5%. S$390m of the S$580m, or about 67% of the loan is on fixed rates due to earlier interest swaps put in place till 2011.

Only one asset secured with the refinancing. Additionally, the refinancing was only secured on one asset, Capital Tower, vs the existing debt which was secured on seven properties (ie Capital Tower, 6 Battery Road, Robinson Point, Starhub Centre, Bugis Village, Golden Shoe Car Park and Market Street Car Park)

No redevelopment for Market Street Car Park. CCT also announced that it would abort its plan to redevelop Market Street Car Park into a office development, “in line with the need to conserve cash in such turbulent economic times”. CCT will also be moving on to enter into longer term leases with the retail tenants in the property, most of which are on short leases. Asking retail rents for the property range between S$12-16psf/mth.

Comments

Positive view, in line with expectations. The announcement is in line with our earliere xpectations that CCT will be able to refinance with a bank financing, rather than a rights issue. We take a positive view of the refinancing as (1) estimated all-in cost of debt for CCT remains within 4.5%, marginally lower than our more conservative assumption of 5%; (2) only one asset secured vs. seven from the existing debt; and (3) ability to secure a simple bank loan rather than a dilutive rights issue. The appearance of two local bankers (DBS and UOB) lends a sense of certainty and stability to the deal. The refinancing is likely to have a positive effect on the Reit sector as a whole. However, this announcement is likely to be the last price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand. The decision to abort Market Street Car Park development did not come in as a surprise, and this had not been factored in our earlier assumptions.

Valuation and recommendation

Maintain Outperform at unchanged target price of S$1.08 (unchanged discount of 10.4%). We maintain our view that CCT is fairly valued at our target price of $1.08, which reflects a bear scenario. However, this announcement is likely to be the last significant price catalyst for CCT this year as we expect more negative news flow on falling office rents and declining office space demand.

CapitaCommercial Trust lands $580m refinancing

Separately, it aborts plans to redevelop Market Street Car Park

CAPITACOMMERCIAL Trust (CCT) has secured refinancing for $580 million of loans due in March 2009.

DBS Bank, Standard Chartered Bank, United Overseas Bank and The Bank of Tokyo-Mitsubishi UFJ will provide a secured three-year term loan of up to $580 million for CCT.

The trust intends to draw down the loan in March 2009 to refinance the borrowings under its commercial mortgage-backed securities (CMBS).

CCT also said yesterday that it would abort the redevelopment of Market Street Car Park into a Grade A office and commercial building.

The trust said in April last year that the decision on the planned redevelopment would be made only after mid-2009.

But after taking into consideration the uncertain market outlook, tight credit conditions, high redevelopment cost and significant size of the project, CCT’s manager has decided to abort the project immediately.

When the redevelopment was first announced in January 2008, CCT said that the total project cost could range from $1 billion to $1.5 billion, depending on the development premium.

Analysts said that it was no surprise that CCT has secured refinancing, as it is backed by property giant CapitaLand.

‘The news is definitely very positive for CCT as well as for the Reit (real estate investment trust) sector as a whole,’ said DMG & Partners Securities analyst Brandon Lee.

In a note yesterday, Kim Eng Research chose CCT as its top pick in the S-Reit sector.

‘We believe that CCT will be able to refinance its debt without much hassle, although inevitably at a higher rate due to the tight credit conditions,’ the firm said before CCT announced its refinancing deal.

CCT said that the all-in interest cost for the loan is well within the projections assumed in a circular to unitholders dated June 9, 2008.

The circular assumed an average interest rate of about 4 per cent per year (including margins and excluding the amortisation of debt issuance expenses) for the 2009.

CCT said that the CMBS is secured by seven of its properties. However, the term loan will only be secured by just one property – Capital Tower.

‘We believe that the banks’ willingness to lend to CCT with security over just one asset, Capital Tower, is an affirmation of their confidence in the quality and value of CCT’s portfolio as well as its bluechip tenant base,’ said Lynette Leong, chief executive of the trust’s manager.

As a result, out of CCT’s portfolio of 11 properties, eight properties with a total asset value of $2.8 billion will be free of any encumbrance.

This will provide the trust with financial flexibility in managing its capital and balance sheet, said Ms Leong.

And as for the decision to abort the redevelopment of Market Street Car Park, Ms Leong said that the move was in line with the need to conserve cash, adding: ‘This decision provides certainty to our investors in removing any overhang in capital requirement.’

CCT can also now enter into longer-term leases and adopt longer-term plans through repositioning the retail tenant mix, she said.

CCT shares lost 4.5 cents, or 4.6 per cent, to close at 93.5 cents yesterday amid a broad market pullback.