FCOT in loan facility extension

IN a move to refinance the debt of Frasers Commercial Trust (FCOT), its trustee British and Malayan Trustees Limited yesterday entered into an agreement with lenders to extend a transferable term loan facility of $500 million for a term of three years.

This extended facility is part of $675 million debts facilities which FCOT’s manager, Frasers Centrepoint Asset Management (Commercial) Ltd, unveiled in June in a recapitalisation move for the real estate investment trust.

DBS Bank, OCBC Bank, Standard Chartered Bank and Commonwealth Bank of Australia, Singapore branch are lead managers for the $500 million facility.

The interest rate for this loan facility is the Singapore swap offer rate plus a margin of 2.65 per cent, excluding upfront fees. It will be secured by Singapore assets, namely KeyPoint, 55 Market Street, China Square Central and Alexandra Technopark.

The loan facility will be used mainly to repay the outstanding amount owed by FCOT on a loan note facility of up to $550 million that had been arranged by Commonwealth Bank of Australia, Singapore branch and CBA Asia Limited. The amount outstanding under the loan note facility is $475 million following the use of proceeds from a recent rights issue.

FCOT had received approval to acquire Alexandra Technopark in July from its sponsor, Frasers Centrepoint Limited (FCL), for $342.5 million. This acquisition will be financed by the issuing of convertible perpetual preferred units (CPPUs), which will entitle FCL to a distribution of 5.5 per cent a year.

FCL will also undertake the master lease for the property for five years, giving FCOT an annual rent guarantee of $22 million.

On Aug 26, Series A CPPUs were issued to FCL Investments Pte Ltd and FCL Trust Holdings (Commercial) Pte Ltd, as nominees of the vendor of Alexandra Technopark.

As at the end of March, FCOT had gross borrowings of $945.5 million, $624.5 million of which would mature in the second half of this year.

In June, FCOT announced its cash call for $214 million in a three-for-one rights issue.

After the completion of the rights issue, the issue of the CPPUs and the refinancing exercise, FCOT will have no debt maturing until 2012.

Fraser Commercial Trust (FCOT) reported results for 2Q09. FCOT recorded gross revenue of $22.7 million (-17.9% yoy, -5.4% qoq), net property income of $17.7 million (-18.0% yoy, -5.2% qoq) and distributable income of $5.6 million (-67.6% yoy, +2.8% qoq). DPU for the quarter is 0.73 cents (-69.6% yoy, flat qoq). FCOT will be paying out a 1H09 DPU of 1.44 cents.

Portfolio performance. Revenue in 2Q09 came off 17.9% from a year ago. We can also observe the trend of revenue. It can be observed that much of the decline came from the Australian properties. From 1Q08, Australia contribution dropped 24.7%, Singapore contribution dropped 17.8% and Japan contribution dropped 14.5%. The main reasons for the dismal performance from Australia were due to the termination of income support of Central Park in 3Q08 and also the unfavorable foreign exchange movement of the AUD. For Singapore, contribution was affected in 2Q09 due to the cessation of income support of Key Point in 2Q09. Japan contribution was affected in 2Q09 because of underperformance of Cosmo Plaza. Revenue contribution by percentage for 2Q09 is 42.8% (Singapore), 40.6% (Australia) and 16.6% (Japan).

Recapitalisation. FCOT will be recapitalizing its balance sheet via:

1. rights issue to raise gross proceeds of $213.9 million
2. acquisition of Alexandra Technopark for $342.5 million
3. issuance of Convertible Perpetual Preferred Units (CPPU) for purchase consideration

After the recapitalization, gearing will be reduced to 38.5%. NAV per share is diluted to approximately $0.26. $179 million from the rights issue will be used to repay existing debt. The remaining balance of debt will be refinanced with two new facilities for a further 3 years. Total debt after refinancing is approximately $804 million.

Valuation and recommendation. The recapitalization exercise has shown the commitment of a strong sponsor backing FCOT in rebuilding its balance sheet. We expect to see a stabilization of revenue from the portfolio. The addition of Alexandra Technopark, which is under a master lease, will provide a stable rental income to FCOT. Together will China Square Central, gross rental income under master leases is approximately 38%. We revise our assumptions to account for the recapitalization and also make changes to our revenue forecasts. We forecast FY09F DPU to be 2.3 cents and following full dilution in FY10F, DPU falls to 1.2 cents. We believe the transformation of FCOT undertaken by the management will take time to crystallize. The first phase of transformation is now completed. The second phase would be the rebalancing of the investment portfolio and we think the management team has the experience and expertise to execute their stated strategy. Our post-rights fair value is $0.125. At the previous day closing price of $0.195, we think market has not factor in the dilution due to the rights units. Maintain sell recommendation.

FCOT gets nod for rights, property buy

ALL resolutions at Frasers Commercial Trust’s (FCOT) extraordinary general meeting, including its proposal to raise $214 million in a three-for-one rights issue and the acquisition of a property from its sponsor for $342.5 million, were passed by unitholders yesterday.

This confirms the $675 million in loans which FCOT earlier said it had secured from a consortium of lenders, on the condition that shareholders approved its proposed recapitalisation exercise.

The new loans, and proceeds from the rights issue, will be used to refinance a significant portion of FCOT’s existing debt, including all debt maturing this year, FCOT said in its June 30 announcement of proposed recapitalisation measures.

The rights issue had been widely expected as the trust’s gearing had risen to 58 per cent at the end of Q1 2009. The real estate investment trust (Reit) had gross borrowings of $945.5 million as at March 31, $624.5 million of which will mature in the second half of this year.

Showing its support, FCOT’s sponsor Frasers Centrepoint Limited (FCL), which has a deemed stake of 22.2 per cent in FCOT now, said that it would take up its entire pro rata entitlement of the rights units and is willing to subscribe for up to 32.7 per cent of all of FCOT’s rights units.

Unitholders’ approval yesterday confirmed that FCOT would buy Alexandra Technopark from FCL and pay for it by issuing convertible perpetual preferred units entitling FCL to a distribution of 5.5 per cent a year. FCL will also undertake the master lease for the property for five years, giving FCOT an annual rent guarantee of $22 million.

At the EGM, the shareholders also approved an amendment to expand FCOT’s current investment policy, allowing it to invest in real estate assets located in the Asia-Pacific region used for commercial purposes.

Emerging from the ashes

• All in one recapitalization package to solve financing woes
• ATP deal a stabilizing factor
• Look beyond near term DPU dilution to underlying implied distressed valuation pricing
• HOLD with TP $0.12

All in one. FCOT is proposing a recapitalization package involving a S$213.9m 3-for-1 rights issue to largely pare debt, refinancing up to S$675m loans and acquisition of Alexandra Technopark to be funded using convertible perpetual preferred units and backed by a 5-year master lease agreement. The end result of a much lower gearing of 38.5% and an improved interest cover of 2.7x, both which are well within covenant limits, would put the reit on a much stronger financial footing.

Purchase of ATP a stabilizing factor. Furthermore, the acquisition of Alexandra Technopark is earnings accretive and will result in greater income stability and lower forex exposure for FCOT. The reit’s portfolio will be more Singapore-centric with 59% of assets situated locally while strong underlying master leases will mean that 74% and 65% of gross rental income at the start of FY11 and FY12 are secured, leading to better income visibility.

Near term DPU dilution but stock valuations already pricing in implied distressed prices. We estimate FCOT’s FY09-10F DPU to be diluted by 35- 64% to 2.2cts and 1.2cts and book NAV lowered 60% to $0.26. We believe investors should look beyond the near term DPU dilution to the underlying value of the reit. The TERP of $0.131, calculated based on the last closing price on the date of announcement, is at 0.50x P/adjusted book NAV and implies distressed valuation pricing to the underlying asset value. Our TP of $0.12 is based on discounting income from existing properties, which are supported by inbuilt organic rental growth structures and adjusted for the rights issue but before CPPU conversion. In the longer run, potential rationalization of the Japanese properties and value enhancement possibilities of the Singapore assets due to their proximity to new MRT stations of the upcoming Circle Line would create further value within the portfolio.

Is what’s good for FCOT just as good for F&N?

FRASERS Commercial Trust (FCOT) last week announced a series of bold steps to recapitalise the group in a bid to address the refinancing concerns raised by investors and analysts.

But while FCOT unitholders will no doubt be following the developments with interest, shareholders of parent Fraser and Neave (F&N) should also take note as the recapitalisation exercise will affect their company directly as well.

FCOT, which has a $1.5 billion property portfolio spanning Singapore, Australia and Japan, plans to raise $213.9 million in a three-for-one rights issue.

It will also acquire Alexandra Technopark from sponsor Frasers Centrepoint (F&N’s property arm) for $342.5 million. FCOT will pay for the purchase by issuing convertible perpetual preferred units (CPPUs) – a financial instrument which to date has only been used by banks in the Singapore market.

FCOT announced as well on the same day that it has secured financing for $675 million from a consortium of lenders. The offers of finance are conditional upon the recapitalisation exercise, which now has to be approved by shareholders.

There can be little argument that the outcome of the proposed recapitalisation exercise is something to be desired. The rights issue and acquisition will see FCOT’s gearing fall from 58.3 per cent at end-Q1 2009 to 38.5 per cent.

And upon completion of the rights issue, the acquisition and issue of the CPPUs, and the refinancing exercise, FCOT will not have any debt due until 2012.

The trust’s gearing hit 58.3 per cent at the end of Q1 2009 as it booked a massive revaluation deficit. And analysts say that more write-downs are likely in the second half of 2009. If the problem is not addressed now, this could push FCOT’s gearing to well beyond 70 per cent – past the 60 per cent limit mandated by the Monetary Authority of Singapore (MAS).

While the real estate investment trust (Reit) will still technically not breach MAS guidelines (as the expected rise in gearing will be driven by the deterioration of the asset base rather than by an increase in gross borrowings), the high gearing would have made it very hard for FCOT to refinance its loans – and downright impossible to refinance at a decent interest rate. The fact that the $675 million refinancing arrangement is dependent on the recapitalisation exercise says a lot.

Less easy to swallow is the three-for-one dilution caused by the rights issue. Once the rights issue is completed, FCOT will have some three billion units in the market. The trust will consider consolidating the units in future, management said.

But FCOT unitholders can at least draw comfort from the fact that parent F&N is going all out to show support for the Reit.

Frasers Centrepoint (which has a deemed stake of 22.2 per cent in FCOT now) will take up its entire pro-rata entitlement of the rights units and is also willing to subscribe for up to 32.7 per cent of the total number of rights units.

And in addition to accepting payment for Alexandra Technopark through the CPPUs – which entitles holders to a distribution of 5.5 per cent a year from the Reit – F&N will also undertake the master lease for the 99-year leasehold property for five years and give FCOT an annual rental guarantee of $22 million, which works out to a 6.4 per cent yield.

This makes Alexandra Technopark the property with the highest yield among FCOT’s Singapore-based assets. FCOT’s Singapore properties have a yield of about 4 per cent currently.

However, what’s good for FCOT unitholders may not be so good for F&N shareholders. First, analysts say that F&N could have gotten a better price for Alexandra Technopark if it had sold the property to a third party buyer. Having said that, there are few benchmarks for comparison as there have not been many large investment transactions in Singapore’s property market so far this year.

The rental guarantee of $22 million that F&N is giving is also more than what the group will receive from all the CPPUs that it got in return for the property (less than $19 million). The company’s deputy group financial controller Hui Choon Kit said that F&N is selling the property to FCOT to support the trust and to strengthen its capital structure.

F&N bought 17.7 per cent of Allco Commercial Reit and 100 per cent of the Reit’s manager for $180 million in July 2008. The Reit was renamed Frasers Commercial Trust, and the plan was to inject Alexandra Technopark and two other properties into the portfolio. While F&N has done this now, it may not be on the terms envisaged by some of its own shareholders, and it may face questions on whether the conglomerate is supporting FCOT at the expense of its own interests.

Asked if F&N regretted buying Allco in the first place, Mr Hui admitted that ‘it has been a lot more challenging than we had anticipated’. But now, the issues have been resolved and F&N has put the Reit in a stronger position, he said. It remains to be seen if F&N shareholders buy that argument.