CCT – OCBC

Working towards refinancing

Tapping on the MTN market. Recently, CapitaCommercial Trust (CCT) issued S$70m of fixed rate notes under its S$1bn Multicurrency Medium Term Note (MTN) Programme and proceeds will be used for repayment of borrowings and working capital purposes. At the same time, CCT also announced that it had repurchased an aggregate principal amount of S$15m of its convertible bonds (CB) that mature in 2013. This is part of the effort to prepare for its refinancing requirement in 2011 as the CB holders have a put option exercisable in May 2011 that would require CCT to redeem the CB. The CB is currently deep out-of-the-money (conversion price of S$1.8349) and the possibility of share price reaching the conversion price by May 2011 seems low. We expect CB holders to exercise the put option next year, which would bring forward the maturity of the CB. 

Higher average cost of debt expected. In comparison to other recent MTN issues, interest rate secured by CCT is on the high side among the MTNs with 5-year maturity (3.288%-3.64%). This came as no surprise, given the weak office sector outlook and thus the higher risk premium compensating the MTN holders. Despite the low interest rate environment, we expect average cost of debt to trend higher in 2010 as the cheaper MTN issued prior to the crisis matures this year and is refinanced by new MTNs with higher cost of debt. 

Pro-active efforts towards refinancing. While recent capital management efforts may not have significant impact, we are still encouraged by the pro-active efforts that the management took to prepare for refinancing next year. As much as S$1,010m of borrowings could be due for refinancing in 2010 (CB holders exercise put option) but unencumbered assets of S$2.6bn (after sale of Robinson Point) should provide sufficient collaterals to secure new loans for refinancing. A reconstitution of CCT’s asset portfolio may also have the positive impact of lowering its risk profile and thus, give CCT better leverage to negotiate for more attractive cost of debt going forward.

Looking for a better entry level. We maintain our estimates and keep our RNAV and fair value unchanged at S$1.16. With a projected total return of 8.4%, we maintain our HOLD rating on CCT. Potential share price catalyst could come from the outcome of the review for Starhub Centre and acquisitions. S$1.05-S$1.10 would be good entry level for accumulation, which would translate to a potential total return of 11.3%-16.6%.