K-REIT – BT

Moody’s affirms K-Reit’s Baa3 rating

Moody’s Investors Service on Monday affirmed the Baa3 corporate family rating of K-REIT Asia (‘K-REIT’). The rating outlook is stable.

The affirmation follows K-REIT’s announcement of a fully-underwritten one-for-one rights offering to raise approximately S$620 million. 81% of the gross proceeds are expected to go towards debt repayment, while the remainder will be used to fund potential acquisitions, asset enhancement initiatives, and working capital needs.

‘Upon completion of the rights issue, K-REIT’s leverage in terms of total debt to assets is expected to decrease from 33% to 9.1%, after taking into account the latest valuation of a 6.3% decline in asset values compared to December 2008. This leverage is strong for K-REIT’s current rating relative to its peers,’ says Kaven Tsang, a Moody’s AVP/Analyst.

‘However, Moody’s believes that this low leverage will not be sustainable if K-REIT is to maintain its long-term financial policy of keeping aggregate leverage at 30% to 40%, while looking for near to medium-term growth opportunities through acquiring new assets,’ says Tsang, adding,

‘However, the size and quality of these potential acquisitions remains unclear for the time being.’

In addition, Moody’s remains cautious over Singapore’s still weak operating environment in the office real estate sector. This is likely to be exacerbated by the substantial supply of new space coming on stream between 4Q2009 and 2013, and could add pressure on already falling office rental rates and result in further asset write-downs. The rights offering will provide K-REIT with ample cushion in its current rating against the challenging operating environment.

The stable outlook is underpinned by the enhanced financial flexibilities and ample headroom stemming from the equity offerings, which position K-REIT’s rating relatively well in the Baa3 level.

Upward rating pressure is likely if K-REIT demonstrates a successful track record in executing its acquisition strategy while maintaining a prudent financial profile.

Downward rating pressure could occur if (1) K-REIT’s business risk profile, operating cash flows, and/or financial metrics weaken, such that EBITDA/Interest coverage stays below 2x and Debt/EBITDA exceeds 9.5-10x on a consistent basis; and/or (2) the company adopts a more aggressive growth policy and tolerates higher leverage to fund new investments.

Moody’s last rating action with regard to K-REIT was taken on 2 September, 2009, when its Baa3 corporate rating was affirmed with stable outlook.