CCT – UBS

Increases flexibility for acquisitions

To issue S$225m 5-year convertible bond due 2015

CapitaCommercial Trust (CCT) intends to issue S$225m of 2.7% unsecured five-year convertible bonds (CBs). The conversion premium of 20% (S$1.356) compares well with CCT's April 2008 S$370m CB (23.9%) and CapitaLand's July 2009 S$1.1bn CB (20%). 10-25% of the proceeds will be used for working capital and 75-90% for asset enhancement initiatives (AEIs)/refinancing. Interestingly, bondholders will not be entitled to an early put option on this issue.

Increases flexibility to make good acquisitions

CCT has no immediate refinancing risk and we view this issue as proactive balance sheet management. We estimate post CB gearing at 35%, after taking into account S$225m Robinson Point divestment proceeds and a S$70m multicurrency Medium-Term Note (MTN) issuance. At a comfortable gearing of 30-45%, the REIT has significant headroom to strengthen its portfolio with good Grade A office acquisitions. We think the share price would perform if the company is able to acquire well. Newsflow on the redevelopment of Starhub Centre would be another price catalyst, in our view.

Accessing cheap debt

The CB's 2.7% coupon would help lower CCT's 3.9% average cost of debt. In the past two months, other SREITs with good credit standing have been able to secure 3-5 year debt at a low cost of 3.3%-3.6%, mainly through MTN programmes. The average cost of debt is now very close to 2005-2006 levels. We believe more SREITs will refinance debt before expiry to lock in these low interest rates. SREITs that have 2010 refinancing events include CapitaRetail China Trust (CRCT) and Starhill.

Valuation: prefer office landlords to residential developers

Our DCF-based price target assumes a 2.6% risk-free rate, 1x beta, and 5% equity. We like CCT, Suntec, Keppel Land, and CDL Hospitality as a tourism play.