Published February 10, 2009

CapitaLand shows it is ahead of the curve

It has moved fast as it realises that markets now like deleveraged outfits

By SIOW LI SEN

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(SINGAPORE) Slightly less than 12 months ago, CapitaLand boss Liew Mun Leong bragged about how the company still had access to the capital markets after selling $1.3 billion convertible bonds despite the credit crunch.

In a BT interview in March 2008, he said that the current credit crunch was making borrowing very difficult for real estate companies whose balance sheets were not too strong. 'If banks are now restricting their exposure to you in direct lending, and the capital market is now very cautious, then funding becomes a problem,' he said. 'For us, we are very well capitalised. Banks still trust us to do the normal borrowing.'

Yesterday Mr Liew seemed to be turning his back on banks and tapping shareholders for funds. CapitaLand announced a $3 billion rights issuance and 30-per cent owned CapitaMall Trust launched its $1.2 billion rights.

While it would be impossible to get that amount of funding from international banks, a blue chip like CapitaLand should be able to borrow from the local banks which are flush with liquidity. In addition, the company has $4.2 billion cash, so why raise equity at a hefty 45 per cent discount, especially when there are no specific acquisitions in mind, were some of the questions asked.

In normal times, you don't raise equity which is expensive and scarce, unless needed.

But these being far from normal times, bankers say CapitaLand is reading the market correctly - which is that investors want deleveraged companies given that no one knows just how long the downturn will last.

Investors now want companies to have fortress balance sheets, to paraphrase JP Morgan's chief executive Jamie Dimon, and CapitaLand wants to be so strong that no one questions it, regardless of how bad the recession gets, said one banker.

'The view is that in Europe and US where things went bad first, banks which raise funds from shareholders earlier did better,' said another.

'In Asia, the downturn is hitting only now, there is a limited pool of capital and it makes sense to go first,' he said.

After the rights issue, CapitaLand's net debt-to- equity ratio will improve to 0.28 from the current 0.47. CapitaMall Trust said its aggregate leverage will reduce to 29.1 per cent from 43.2 per cent assuming it repays borrowings with the rights proceeds.

CapitaLand's move is seen as tactical, strengthening its balance sheet, preparing for the downturn and ready for opportunities which will come.

Mr Liew may not feel much like thumping his chest but one admirer said: 'By being the first, he's listening to the market.'