Published July 6, 2009

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

By UMA SHANKARI

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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.

Adding fizz: Parent F&N is showing support for the Reit

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.