K-REIT – BT

K-Reit’s OFC deal wins nod from Moody’s

S&P gives trust BBB rating, with ‘stable’ outlook

TWO rating agencies have issued new reports on K-Reit Asia after news this week that the office trust will acquire from parent company Keppel Land an 87.5 per cent interest in Ocean Financial Centre (OFC) – for a period of 99 years – for $1.57 billion.

Moody’s Investors Service on Wednesday changed its outlook on K-Reit’s ‘Baa3’ corporate family rating to positive from stable. And Standard & Poor’s Ratings Services (S&P) yesterday initiated coverage with a ‘BBB’ long-term corporate credit rating and a ‘stable’ outlook.

K-Reit has also proposed a 17-for-20 rights issue, which is expected to raise around $976.3 million, to part-finance the purchase. New debt of around $602.6 million will cover the rest of the cost.

Moody’s views the proposed acquisition as ‘mildly positive’ as it will result in a much strengthened property portfolio – although at the expense of somewhat higher leverage in the interim, said analyst Alvin Tan.

‘By acquiring another prominent commercial asset in Singapore’s central business district, K-Reit will substantially increase its total portfolio size by 52 per cent to $5.9 billion,’ Mr Tan said.

He added that although the scale of the transaction is substantial, the financing plan comprising a ‘balanced’ combination of debt and equity issue will result in only a modest increase in total debt/deposited property value to 41 per cent from 39 per cent.

S&P credit analyst Loy Wee Khim thinks that the proposed acquisition will enhance the trust’s business risk profile.

But Ms Loy added: ‘We believe K-Reit’s financial risk profile will weaken after it acquires OFC.’

‘In our base-case scenario, we expect the trust’s leverage (ratio of adjusted total debt to property portfolio value) to rise to about 42 per cent by the end of 2011. We, however, expect the ratio to decline to less than 40 per cent in the next one to two years and be in line with our expectations for the BBB rating,’ said Ms Loy.

S&P’s rating on K-Reit reflects the trust’s good quality assets, solid market position in the Singapore commercial space, and an intermediate financial risk profile.

But the trust’s limited geographic diversity – with 93.1 per cent of its assets located in Singapore – and an increased concentration of tenants from financial institutions temper these strengths, Ms Loy said.

K-Reit shares eased half a cent to close at 93.5 cents yesterday.