Author: tfwee
CMT – JPM
Not more than a small tidy-up of balance sheet required
• The optics of gearing in a market intolerant of it: CapitaMall Trust (CMT)’s gearing is the highest of the top four S-REITs at 43.3%. Whilst our review of CMT’s financials in an adverse but (in our view) plausible downside scenario indicates a high level of resilience in the
REIT’s credit position, a modest equity fund-raising of between 10-20% new units would push gearing down below 40% whilst a 1-for-3 entitlement offer would raise sufficient equity to lower gearing to 31%.
• Operating and financing conditions have changed: Whilst Singapore’s suburban retail property fundamentals have been resilient through recessions, CMT’s operating risk has risen with 28% of the portfolio in non-suburban retail property assets (by value). The trust has S$1.8billion of debt (56% of the total) maturing in 2011-2012, which is sufficiently distant but we believe a far-sighted CFO will want to keep those debt maturities in view in any re-configuration of the REIT’s liability profile. CMT’s 2013 convertible bonds are trading at a yield to 2011 put at approximately 13.5%, and skew the trust’s aggregate cost of capital. We estimate CMT’s current implied cost of equity at 12.1%.
• Sectoral re-capitalization to be the dominant price factor: We expect the S-REIT sector’s debt refinancing and re-capitalization, including CMT’s own initiatives, to be the most significant factor propelling the trust’s unit price in the next 6 months.
• Dec 09 price target of S$2.20/unit: Our new price target (previously S$2.78) is based on a DDM using an 8.1% discount rate. A 1-for-3 entitlement issue raising about S$551 million would lower our estimate of CMT’s NPV by an immaterial 4% due to the offsetting effects of reduced financial risk. Key risks to our price target and rating come from a worse than expected deterioration in operating fundamentals, or a prolonged capital markets disruption which prevent a resolution of the anomalous costs of equity and debt capital.
MI-REIT – BT
Moody’s cuts MI-Reit’s ratings; review for possible downgrade
Moody’s Investors Service has on Wednesday downgraded Macarthurcook Industrial REIT’s (‘MI-REIT’) corporate family rating (‘CFR’) to Ba2. The rating remains on review for possible downgrade.
‘The downgrade reflects Moody’s views that MI-REIT is not likely to meet the scale and diversity targets that were built into its original rating when it was first assigned ‘, says Kathleen Lee, Moody’s lead analyst for the trust.
‘As a result MI-REIT shows high levels of asset and tenant concentration, more consistent with a Ba2 rating,’ adds Lee.
‘In addition, the trust has an outstanding sale & lease-back arrangement with a call and put option in respect of 4A International Business Park (entered into since August 2007) which if completed by end-December 2009, on fully-debt financed terms, would result in a material weakening of its credit metrics’, continues Lee.
‘There also remains considerable uncertainty as to how this acquisition will be funded if the put option is exercised by the vendor,’ she added.
‘The rating remains on review for downgrade primarily reflecting ongoing concerns surrounding MI-REIT’s significant refinancing risk with 91% of its total debts, or S$201 million, falling due in April 2009, amid very challenging credit markets conditions’, says Ms Lee.
‘The absence of available committed facilities and the REIT’s lack of extensive relationships with banks have significantly constrained MI-REIT’s liquidity profile and increase the risk of further downgrades’ adds Ms Lee.
Moody’s acknowledges that MI-REIT’s rating continues to be supported by its steady revenue streams supported by a relatively long lease maturity profile and adequate lease deposits that partially mitigates the trust’s low asset diversification and moderate tenant concentration.
The review will continue to focus on:
1) MI-REIT’s progress in securing committed financing to meet its debt maturities in April 2009 as well as the final contracted terms & conditions once refinancing is raised, and
2) the funding plan for the committed acquisition. The ratings could decline rapidly if material progress on securing committed financing for its April 2009 debt maturities is not made over the course of the next 2 months.
Headquartered in Singapore, MI-REIT is a real estate unit trust that was formed primarily to own and invest in a diversified portfolio of industrial properties. The company reported total assets of approximately S$568 million and gross revenue of $12.4 million for the first quarter ended 30 September 2008.
CCT – BT
CCT shares fall on refinancing jitters
Market nervous over loans that are yet to be confirmed, analysts say
SHARES of CapitaCommercial Trust (CCT) fell as much as 11.9 per cent yesterday after it said that it was pursuing its refinancing needs with several institutions.
‘As and when the refinancing is finalised, the necessary announcements will be made,’ the real estate investment trust (Reit) said in a statement to the Singapore Exchange after the market closed last Friday. CCT was responding to a news report that said it had verbally mandated four banks to handle a $580 million three-year refinancing exercise.
CCT shares fell to as low as 70 cents yesterday before ending 6.5 cents down at a one-year low of 73 cents.
Analysts said that the shares took a beating because market was jittery that the loans had not been confirmed.
‘It’s just reaction to Friday’s announcement,’ said one analyst.
Concerns remain over many Singapore-listed Reits’ access to credit and ability to refinance borrowings at competitive rates.
‘The area of focus for S-Reits over the next 12-15 months would remain refinancing issues, with a third of the total $15.6 billion worth of indebtedness due to be rolled over during this period,’ DBS Group Research analyst Janice Chua in a note yesterday.
On Friday, Frasers Commercial Trust (FCOT) said that it took a $70 million loan from parent company Fraser and Neave to repay a loan due the next day. FCOT is now in discussions to refinance the $70 million loan and all debt maturing next year.
In response, Standard & Poor’s Ratings Services yesterday took the trust off ‘CreditWatch’ status and said that the outlook is stable.
‘The stable outlook factors in Standard & Poor’s expectation of FCOT putting in place committed refinancing arrangements for the $550 million debts by March 31, 2009,’ S&P said. ‘The rating may be placed on CreditWatch negative or lowered if this is not in place. A rating upgrade has become more challenging for FCOT, given that refinancing costs are expected to be higher and that access to equity has declined due to the volatile financial market.’
FCOT shares closed unchanged at 21 cents yesterday.
FCOT – DBS
One in the Bag
Story: The much awaited re-financing of Frasers Commercial Trust (FCOT)’s short-term S$70m loan expiring in Nov’08 has been finalized. The loan was obtained from their parent F&N for a period of 6 months to March ‘09 at a cost of 3.7%. The manager aims to refinance this loan together with the S$550m tranche expiring in 2009. Given the strong backing of F&N as its sponsor, we believe that re-financing of these loans should not be a problem.
Point: During our post results road show and results briefing, these issues were highlighted.
(1) strategic review continues. Management of FCOT will be keen to divest its Japanese exposure (valued at S$228m) when the opportunity arises. This is astute given the parent’s relatively lack of exposure in Japan. Its Australian assets remain as part of FCOT plans moving forward, given its strong underlying cash flow.
(2) the need to re-capitalize and a stronger balance sheet. At gearing of 49% vs S-Reits 30+%, FCOT’s high financial leverage not only incurs high debt servicing costs but also exacerbates the perceived risk given the current tight liquidity environment. We believe that ways that management could explore in solving the current gearing issue will be through (i) an asset sale, possibly Japanese assets, (ii) equity raising either from a straight asset swap or fresh equity call.
(3) Improving operational performance. Management will continue to optimize yields at its assets, particularly Keypoint where occupancy has fallen to 75% in Sept’08. Management aims to bring it up to 90% by end FY09.
Relevance: While FCOT remains one of the cheapest reits at 0.2x P/BV, the overhang of its ST debt re-financing needs with an overhang from a possible equity raising could likely weigh on share price performance in the near term. As such, we maintain HOLD, TP $0.31, pending affirmation of abovementioned plans.
FCOT – SGX
Frasers Commercial Trust refinances short term debt
Under the terms of the Loan Agreement, F&NT has today extended S$70 million to the Borrower which has been utilised for repayment of S$70 million of Loan Notes issued to the Commonwealth Bank of Australia, Singapore Branch..
The Loan, which is made on normal commercial terms and on arms’ length basis, is for an initial period of six months and with an interest rate of 3.73% per annum.
The Manager is in discussions to refinance the Loan together with all debt maturing in 2009 and will update the market at the appropriate time.