CCT – GS

No refinancing risk, implies convertible bond more for acquisitions

News

CCT announced today (17 Mar) the issue of S$225mn of Convertible Bond (CB) due in 2015, with an over-allotment option of S$25mn. This marks CCT's second CB issue following the S$370mn, 2.0% coupon in April 2008; the conversion premium on the issue was 23.9%. Pricing details of today's CB was not available at the time of this report. CCT intends to use 10%-25% of the proceeds for general working capital purposes and the remaining 75%-90% for asset enhancement initiatives (AEI) and debt refinancing. Applying the same premium of its past CB would suggest that the new CB could account for 6%-7% of current shares outstanding, under a full conversion. We estimate 2010 gearing could rise to 36% from 32%.

Analysis

Although bite-sized, we think the proceeds from CB provides financial flexibility and paves the way for long awaited acquisition(s) and/or AEIs to enhance its Office portfolio, allaying market concerns that it is losing its foothold in the Office market with the sale of Robinson Point and potential redevelopment of Starhub Centre to residential. We estimate CCT will have available cash balance of S$600mn for acquisitions post its Robinson Point sale (proceeds of S$203mn) and S$150mn MTN that is due in Mar. Further, we think with CCT's current levels of leverage, the company should be under no refinancing pressure as its S$370mn CB put option is only due in May 2011 and S$520mn CMBS only due in Sep 2011. Positive read-across for the SREIT sector, with CCT's issue following A-REIT's S$300mn issuance of Exchangeable Collateralized Securities on 15 Mar, suggesting an improving debt market that could pave the way for acquisition-led growth.

Implications

We think the CB paves the way for CCT's portfolio reconstitution strategy to further enhance asset quality. We favor discounted prime Office exposure; CCT's implied market value is S$1,460 psf, 10%-15% below recent prime grade transactions, which we think is not representative of CCT's prime portfolio. Maintain Buy and TP; CCT is trading at 0.8X '10E P/B and 6.2% '10E div yield.