https://www.moodys.com/research/Moodys-a..._PR_313929
Moody's assigns Baa3 issuer rating to Frasers Commercial Trust, withdraws CFR
Global Credit Research - 27 Nov 2014
Singapore, November 27, 2014 -- Moody's Investors Service has assigned a Baa3 issuer rating to Frasers Commercial Trust (FCOT), following the withdrawal of its Baa3 corporate family rating. The outlook for the rating is stable.
RATINGS RATIONALE
The rating action follows Moody's decision to no longer reflect subordination in FCOT's rating. In September 2014, the trust successfully refinanced all of its secured debt with unsecured debt, which no longer subordinates unsecured creditors within the overall debt structure.
The refinancing has resulted in all five properties of FCOT to be unencumbered. It has also lengthened its average debt maturity to 4.3 years as of 30 September 2014 from 2.0 years a year ago.
"We see this move to be credit positive for FCOT, as it improves the trust's financial flexibility", says Jacintha Poh, a Moody's Assistant Vice-President and analyst.
"The trust has demonstrated its ability to maintain a balanced lease expiry profile, which helps to generate stable rentals and recurring cash flows, despite its small asset size and revenue", continues Poh.
As of 30 September 2014, FCOT's long-weighted average lease expiry profile by gross rental income -- of 3.9 years -- is supported by the weighted average lease expiries of around 7 years for its Australian properties, compared to 2 years for its domestic properties. Australia generally has longer leases as the tenancy tenure lasts for approximately 10 years, whilst properties in Singapore generally have lease tenures of around 3 years.
In addition, the trust was able to improve its revenue as a result of positive rental reversions achieved in both Singapore and Australia by between 14% to 21% for both new leases and renewals which commenced in the financial year ended 30 September 2014.
"We expect FCOT to be able to grow its rental income, in particular following the expiry of master lease at Alexandra Technopark, and given our expectation that rents for its Singapore properties will grow due to limited new supply of offices over the next 12-18 months", adds Poh.
On 25 August 2014, the master lease at Alexandra Technopark expired, and the trust now receives rents directly from its underlying tenants.
FCOT's credit metrics are healthy, with adjusted debt to total deposited assets of 37%, and adjusted EBITDA/Interest coverage of 4.1x as of 30 September 2014.
The rating outlook is stable, reflecting Moody's expectation that FCOT's properties will continue to generate stable income, driven by steady occupancy levels and organic growth from positive rental reversions.
Moody's would consider upgrading the rating if FCOT: (1) maintains a balanced debt maturity profile; and (2) improves its financial metrics, such that debt/total deposited assets falls below 35%-40% and EBITDA/interest coverage is above 4x for a prolonged period.
FCOT's rating could be under pressure if: (1) the operating environment deteriorates, leading to higher vacancy levels and lower operating cash flow; and/or (2) its financial metrics deteriorate, with debt/total deposited assets exceeding 45%, EBITDA/interest coverage declining below 2x and secured debt/total deposited assets exceeds 15%-20% on a consistent basis. In addition, an aggressive growth policy in terms of leverage or reliance on short-term funding would also pressure the rating.
The principal methodology used in this rating was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
FCOT, formerly known as Allco Commercial REIT, was listed on the Singapore Stock Exchange in March 2006. It was acquired by Frasers Centrepoint Limited (FCL) on 14 August 2008, following which it was renamed. FCOT has a portfolio of five properties -- two office buildings and one business space in Singapore and a premium and a Grade A office building in Australia -- with a combined appraised value of approximately SGD1.8 billion, at of 30 September 2014.
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