Published May 27, 2009

Did the market 'talk' CCT into a rights issue?

By UMA SHANKARI

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CAPITACOMMERCIAL Trust (CCT) last Friday announced an $828.3 million one-for-one rights issue.

The question, however, is whether the office trust really needs a rights issue at this point in time as it faces no immediate refinancing worries. After the successful refinancing of $580 million of debt early this year, CCT secured another $160 million term loan recently, clearing all its debt obligations in 2009. So the bulk of the proceeds from the rights issue are intended to be used to pay off borrowings due in 2010.

'Despite CCT's significant debt over 2010-12, we earlier believed that CCT would have the capacity to refinance with straight debt,' said CIMB analyst Janice Ding. 'We were disappointed by the announcement and the implied dilution.'

The rights issue seems especially unnecessary when the following factors are considered - parent company CapitaLand is well-capitalised; CCT's average cost of debt remains low at 3.6 per cent; the trust has yet to tap on more than half of its existing $1 billion Medium Term Note programme; and some $2 billion worth of CCT's assets (which can be used to secure loans) remain unencumbered.

Another office trust, Suntec Reit, also successfully refinanced more than $825 million of debt recently - even without a strong sponsor. There are plenty of other indications that the tight credit conditions that Reits were facing a year ago are beginning to ease.

So why the 'painfully dilutive' (as one analyst put it) rights issue? Could the market have played a large part in CCT's decision?

The market had responded positively to a succession of cash calls from CCT's parent CapitaLand and its retail trust CapitaMall Trust (CMT), as well as Keppel Land. All three stocks gained following their rights issue announcements.

In contrast, speculation that CCT will resort to a rights issue has dampened the Reit's share price performance.

Over the past few months, analysts have repeatedly said that CCT would need to raise some form of equity.

In its April 15 update, for example, Nomura Research pointed out that CCT might need to raise additional equity of around $867.1 million to ensure gearing remains below 0.4 times. Macquarie Research also said in a recent note that there was still a risk of equity issuance in the next six to nine months.

It was something CCT appeared to have taken notice of. 'I think the reality is that the market . . . has been expecting some form of equity fund raising (from CCT),' Olivier Lim, CapitaLand's chief financial officer, who is also a director of CCT's manager, told analysts and media at a briefing on Friday.

Mr Lim also noted that earlier in the year, CMT and CCT took different routes to financing. CCT refinanced using bank loans, while CMT raised $1.23 billion in a 9-for-10 rights offer. CMT's method proved more popular with the market, he said.

With the rights issue, CCT is taking a very conservative approach to its gearing. The trust saw the value of its portfolio fall 10.15 per cent in the latest valuation exercise, from $6.71 billion in December 2008 to $6.03 billion as at May 22.

The fall in portfolio value - which was caused by valuers factoring in falling office rents - would have pushed up the Reit's gearing from 38.3 per cent to 43.1 per cent. With the rights issue, the gearing will instead fall to 30.7 per cent - close to the low end of the Reit's target gearing range of 30 per cent to 45 per cent.

However, the Monetary Authority of Singapore has set a 60 per cent threshold for a Reit's gearing - which means CCT still has some buffer. Although, with the outlook for office rents remaining bleak at least until 2011 with office asset values possibly falling even further, CCT's pre-emptive rights issue could help prevent gearing from reaching truly uncomfortable levels over the next few years.

But it's still debatable if that is enough to justify a rights issue that has a sharp dilutive effect.