Moody’s affirms Frasers Centrepoint’s Baa2 rating; changes outlook to stable

Frasers Centrepoint
The stable outlook reflects Moody’s expectation that FCT will be able to maintain its track record of strong operating performance

SINGAPORE: Moody’s Investors Service has affirmed Frasers Centrepoint Trust’s (FCT) Baa2 issuer rating.

At the same time, Moody’s has changed the outlook on the rating to stable from negative. The rating action follows FCT’s announcement on 3 September that it will (1) acquire the balance 63.1% stake in Asia Retail Fund Limited (ARF); (2) raise up to SGD 1.3 billion through an equity offering; (3) divest Bedok Point for SGD 108 million.

“The affirmation of FCT’s Baa2 rating balances Moody’s expectation that FCT’s business profile will improve considerably following the completion of the proposed acquisition, but that its leverage will remain elevated over the next 12-18 months,” says Sweta Patodia, a Moody’s Analyst.

“The change in outlook to stable reflects FCT management’s commitment to maintain its credit profile as evidenced by its planned equity issuance and asset disposal, which in turn will also help to enhance the trust’s liquidity profile. The change in outlook also takes into account the improvement in tenant sales and shopper traffic at FCT’s retail malls, which have rebounded strongly following a sharp slump during the circuit breaker period in Sinagpore,” adds Patodia, who is also Moody’s Lead Analyst for FCT.

The transaction remains subject to unit holder approvals and is expected to close over the next 2-3 months.

 FCT’s business profile will improve materially upon completion of the proposed acquisition, with its asset size increasing by almost 70% to SGD6.6 billion from SGD3.9 billion currently. With ownership of 6% of total retail space in Singapore, FCT will become the second largest mall owner in the country after CapitaLand Mall Trust (CMT, A2 under review for downgrade).

The acquisition will also strengthen FCT’s position as one of the leading suburban retail mall operators in Singapore. Upon completion, FCT will own 10.2% of total suburban retail space in Singapore, only marginally lower than CMT’s 10.6%.

Following the completion of the proposed acquisition, FCT will own a 100% stake in ARF and will consolidate it within its financial statements, compared to the current practice of equity accounting. With full consolidation, FCT’s revenue and EBITDA mix will improve.

The higher contribution from ARF will also help to mitigate the earnings concentration risk from Causeway Point. Moody’s expects Causeway Point’s earnings contribution to reduce to around 23% by the fiscal year ending September 2021 (fiscal 2021) from around 36% for the six months ended 31 March 2020.

Notwithstanding the significant improvement in FCT’s business profile, ARF has almost $1.4 billion of debt outstanding, which when consolidated into FCT’s financial statements will limit the improvement in FCT’s financial metrics.

Nonetheless, given that 100% of the proposed acquisition will be funded out of equity, the impact on FCT’s credit metrics will be contained. In particular, FCT’s net debt/EBITDA, which Moody’s expect to be around 11.0x for fiscal 2020, will improve to around 8.8x-9.0x by fiscal 2021, pro forma for the acquisition.

Pro forma for the proposed transactions, FCT will have excellent liquidity. FCT intends to use a part of the equity proceeds to repay SGD250 million of existing debt, leaving just SGD50 million maturing till fiscal 2021.

In comparison, proforma cash and cash equivalents were around SGD187 million as of 30 June 2020. FCT also has access to SGD100 million of long term committed revolving credit facilities in addition to other short term uncommitted facilities. FCT’s liquidity is further supported by its long-term banking relationships and track record of strong access to the debt and equity capital markets.

The stable outlook reflects Moody’s expectation that FCT will be able to maintain its track record of strong operating performance, and that its credit metrics will return to within the rating thresholds by fiscal 2022 as it benefits from a full year of earnings contribution from ARF.

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