Despite downgrade, Allco Reit gets some relief

It manages to secure extension of its debt repayment deadline

Allco Commercial Real Estate Investment Trust (Allco Reit) – which went to court to fend off a ratings downgrade – has succeeded in obtaining an extension of its debt repayment obligations, despite the ratings cut.

The trust had sought to obtain an injunction to prevent Moody’s Investors Service from downgrading its credit rating, as it feared the revision would hurt its efforts to refinance some S$620 million in debt.

But the injunction was set aside this week and Moody’s went ahead to lower Allco Reit’s corporate family rating to ‘Ba2’ from ‘Ba1’ – and retained the ratings on review for further possible downgrade.

The trust, however, still managed to obtain some relief on its debt refinancing obligations.

Allco (Singapore) Limited, the manager of Allco Reit, announced yesterday that the trust had received in-principle approval for the extension of the maturity date of S$550 million of debt from July 31, 2008 to Dec 31, 2009.

Allco Singapore said that it is reviewing the terms and conditions of the extension and will soon execute binding documentation.

It expects to repay the remaining S$70 million of debt, due to mature on Nov 22, 2008, with the proceeds Allco Reit is likely to receive from Allco Wholesale Property Fund – which has interests in several properties in Sydney.

Allco Reit had announced earlier this month that it is considering selling the assets of Allco Wholesale Property Fund – and intends to return the net proceeds to unitholders in the third quarter of this year.

It was this proposed sale of its Australian assets that sparked off the ratings downgrade in the first place.

Moody’s ratings review panel had decided to meet, upon Allco Reit announcing its intention to divest its Australian assets – properties valued at A$483 million (S$603.3 million). The panel agreed to downgrade the trust’s credit rating, on the basis that the sale would affect its credit standing.

Allco Reit felt the agency’s move was ‘precipitous and wholly unwarranted’, as it had not yet sold the assets but was only considering doing so. It sought an injunction to prevent Moody’s from issuing the downgrade, as it felt that would hurt its attempts to obtain credit approvals from bankers for the refinancing of the S$620 million in debt.

But Moody’s battled the injunction, arguing that it undermined the agency’s very purpose and integrity and that it would prevent the public from accurately judging Moody’s assessment of Allco Reit’s credit worthiness.

The High Court set aside the injunction on Tuesday, and Moody’s issued its downgrade.

Allco Reit says debt extension approved

Singapore-listed Allco Commercial Real Estate Investment Trust said on Thursday it has received in-principle approval for a 17-month extension of the maturity date for $550 million (US$396.5 million) of its debt.

The Reit’s manager ‘is currently reviewing the terms and conditions of the extension and will execute binding documentation as soon as practicable,’ it said in a statement, adding that the due date has been extended from July 31 this year to end-December 2009.

Allco Reit said that another $70 million of debt due to mature on 22 November this year will be repaid in full with the proceeds from its sale of the Allco Wholesale Property Fund.

Allco Reit, which owns malls and offices in Singapore and Australia, late on Wednesday announced the resignation of three directors appointed by parent Allco Finance Group so that the board will have a majority of independent directors.

Moody’s Tuesday downgraded Allco Reit’s rating to Ba2 from Ba1 and said the rating ‘remains on review for further possible downgrade’.

That followed a a failed legal attempt by the Reit to stop Moody’s from downgrading its shares as that would have complicated the trust’s fundraising efforts. — REUTERS

Allco Reit fails in legal bid to head off ratings downgrade

Moody’s lowers rating after court sets aside injunction

Allco Commercial Real Estate Investment Trust (Allco Reit) has failed in its attempt to obtain a court injunction to head off a downgrade by Moody’s Investors Service.

And the ratings agency has gone ahead to downgrade the Reit, as well as signal the possibility of a further cut in ratings.

Allco Reit, represented by Senior Counsel Alvin Yeo of Wong Partnership, had applied for an injunction from Singapore’s High Court to prevent Moody’s from issuing a downgrade on the trust.

It is believed the Reit sought the injunction as it felt that a ratings downgrade would have interfered with its fund-raising efforts.

The application for the injunction had been initiated by British and Malayan Trustees on behalf of Allco Reit.

But the Reit’s injunction was set aside yesterday morning by Justice Choo Han Teck. Allco Reit had intended to appeal the decision, but the High Court announced several hours later that the trust had decided to withdraw its appeal.

Moody’s subsequently went ahead with its downgrade of Allco Reit, announcing its rating yesterday afternoon. The agency lowered the trust’s corporate family rating to ‘Ba2’ from ‘Ba1’ – and retained the ratings on review for further possible downgrade.

It said that the review would focus on issues raised by Allco Reit’s announcement on March 9, the progress and terms of its refinancing efforts for debt maturing in coming months and other material developments affecting Allco Reit.

Representatives from Allco Reit, when contacted, declined to comment on the court proceedings. But the Reit’s manager, Allco (Singapore) Limited, subsequently issued a statement on the Singapore Exchange’s website, confirming the ratings downgrade and ongoing review of that rating by Moody’s.

Allco Reit’s concerns about the impact of a ratings downgrade on its fundraising efforts were heralded by Fitch Ratings last week. Fitch had signalled that the credit ratings of Singapore property trusts may change because of expected mergers and acquisitions.

Fitch had expressed concern that the global credit crunch sparked by US mortgage defaults may impact the ability of Singapore Reits to take advantage of any acquisition opportunity and that it would certainly limit the number of any interested parties in any asset disposals.

Allco Reit had earlier this month said that it may sell its Australian assets – properties valued at A$483 million (S$617 million) – which include its 50 per cent interests in Perth’s Central Park office tower and Centrelink Headquarters in Canberra. The Reit is also invested in Allco Wholesale Property Fund which in turn has interests in several properties in Sydney.

Its three key properties – China Square Central and 55 Market Street in Singapore, and Central Park in Perth – had a combined value at the end of December of $1.13 billion, based on the latest revaluation.

Press Release:

Allco (Singapore) Limited (“Manager” or “Allco Singapore”), the manager of Allco Commercial Real Estate Investment Trust (“Allco REIT”) (SGX: ALLC) refers to the media release issued by Moody’s Investors Service, Inc. (“Moody’s”) in relation to Allco REIT on 18 March 2008. The Manager confirms that today Moody’s downgraded Allco REIT’s corporate family rating one level to Ba2 from Ba1 and has continued to place the rating on review.

Unlocking its asset values

Story: Allco REIT has announced that I) Allco Principals Investment Pty Limited (API) has been served a receivership notice. While API does not have a direct stake in Allco REIT, it holds 51% in the REIT manager and has an income support arrangement totaling A$8m till Mar’09.

Separately, Allco REIT also announced a strategic review in of its portfolio, which may result in a divestment in its Australian properties.

Point: In our view, both this events could have a slight dilutive impact on earnings in the near term. The loss of income support agreement is possible given that it is unsecured. Therefore, we have cut our DPU forecasts by 5% in FY08 and FY09 to 6.7cts and 7.0 cts respectively.

In addition, while we view that it could be a good time to divest its Australian property given the toppish office cycle, interest savings from paring down debt is unlikely to offset the vacuum in earnings in the near term. Our sensitivity analysis of a sale of Central Park indicates a base case scenario where we have assumed management to use sales proceeds to repay its existing debt facilities further erodes DPU by another 10%. Management has also indicated that it could look to diversify into Malaysia to boost forward income streams. However, no timeline is indicated.

Relevance: Allco’s share price had fallen by c.10% since the beginning of the year and is currently trading at attractive 8.3% FY08 and 8.7% FY09 yield. Our DCF – backed revised TP of S$1.54 offers 49% upside. Key uncertainty for this stock is the lack of clarity of potential reinvestment plans moving forward, which will lead to a drag in share price in the near term.