Less than a week after Mapletree Investments proposed to merge two of its commercial REITs, Moody’s Investors Service has placed Mapletree Commercial Trust under review for a potential credit rating downgrade as MCT’s Temasek Holdings-backed sponsor works to sell the deal to investors as a “win-win” transaction.
Moody’s said Tuesday that the rating of MCT, which is set to absorb Mapletree North Asia Commercial Trust (MNACT) via the proposed merger, is under review for a possible downgrade of up to one notch on expectations of incurring heavier debt, especially if the larger entity, to be named Mapletree Pan Asia Commercial Trust (MPACT), will adopt a more aggressive long-term financial approach.
“The review for downgrade reflects the potential weakening of MCT’s credit metrics and uncertainty around its financial policy following the merger with MNACT,” said Moody’s analyst Junling Tan. “However, the final impact remains uncertain as the merger is still subject to, amongst others, the approval of the unitholders.”
The latest update comes after the REITs’ managers, which are both units of Temasek-owned Mapletree, offered to consolidate MCT and MNACT to form the seventh-biggest REIT in Asia through a S$4.22 billion ($3.13 billion) deal.
Higher Debt For MCT
In a note to investors after the proposed merger was announced, OCBC Investment Research nodded to the potential advantages of a larger REIT, while pointing out that MCT unitholders could face greater risk via the enlarged REIT’s broader geographic base, while trading equity in a profitable REIT for ownership of a money-loser.
“While we are not overly excited about this proposed merger from MCT’s perspective, given its new exposure to riskier markets such as China and Hong Kong and dilution of its pure-play Singapore status, we acknowledge the importance of scale in the REITs industry and the strategic benefits the enlarged REIT brings, as highlighted above,” the bank’s research team said.
Moody’s said MCT’s Baa1 issuer rating and (P)Baa1 senior unsecured ratings on its medium-term note programmes have both been placed on review for downgrade, and the agency revised its outlook for all of the trust’s ratings to “under review” from “stable”.
A “more aggressive long-term financial policy” post consolidation and the impact of a bigger and more diversified portfolio on the enlarged entity may result in a rating downgrade, Moody’s said, adding the REIT would increase its debt levels due to the “weaker leverage profile” of MNACT, on top of the expected additional obligations the consolidated trust would have to shoulder to fund the acquisition.
Assuming the merger is completed, Moody’s estimates that MCT’s ratio of net debt to earnings before interest, tax, depreciation and amortisation may rise to 9.9 from just 8.2 in its fiscal year ending March 2022, an increase that would breach the 8.5 threshold the trust must maintain to keep its current Baa1 rating.
Upside for MNACT
For MNACT, Moody’s is set to review its Baa3 credit rating for a potential upgrade, as well as the current ratings on its existing securities. The outlook on all of the trust’s ratings has also been updated from “negative” to “rating under review”, but the debt watcher said MNACT’s business profile and credit metrics would “remain largely unchanged” post-merger.
“The review for upgrade reflects our expectation that MNACT’s rating could benefit from its 100 percent ownership by MCT, following the completion of the proposed merger,” Tan said.
Moody’s said an upgrade is possible if MNACT’s stand-alone credit profile remains intact and MCT is willing to extend “extraordinary support” in the event of distress.
The agency said the trust is very liquid, with cash worth S$218 million on top of its undrawn committed credit facilities, enough to cover upcoming maturities worth S$568 million in the next 15 months.
Managers Dangle Incentives
The plan is a “win-win” solution for all unitholders of both entities, according to the managers, who even waived all acquisition fees to demonstrate their “commitment and support” to the success of the merger and the enlarged trust. They also gave MNACT holders the option to choose cash or a combination of cash and scrip for each unit they give up.
Set to be voted on around mid-April, the proposed merger met with mixed reviews from other observers given MNACT’s weaker performance compared with the other REIT. Analysts from OCBC Investment Research and UOB Kay Hian Research maintained a “buy” status on MCT units as of Monday, while DBS Research on Thursday removed MNACT from a list of recommended top equity picks for its investors aiming for dividends.
For Chua Su Tye, head of REIT research at Maybank Securities, the plan presents “strategic merits” for MCT, since the trust would benefit from an expanded and more diversified portfolio that could address the lack of growth drivers in its Singapore-only strategy and the limited sponsor pipeline.
“The merged entity will see reduced asset concentration, with the exposure to any single property being no more than a quarter of AUM (assets under management), compared to MCT’s existing 43 percent exposure to Mapletree Business City and 36 percent in VivoCity,” Chua told The Breakfast Huddle podcast on Thursday.
MCT Stock Pummeled
While investment banks have been reserved in their reaction to Mapletree’s REIT scheme, the market views the deal as negative for MCT, with units in the trust down 8 percent at S$1.84 on Thursday from S$2.00 on 27 December, before the merger was announced. MNACT’s equity remained flat at S$1.09, moderating from Monday’s S$1.15 peak, the highest level since the rally began in October.
The proposed merger is expected to be completed during the second half of 2022 or early 2023 should unitholders approve the deal, with MNACT then to be de-listed from the Singapore Exchange in mid-June.
The result would be a bigger and more diversified portfolio comprising 18 assets measuring 11 million square feet (1.02 million metres) in total net lettable area across Singapore, China, Hong Kong, Japan and South Korea.
MPACT is poised to be the seventh-biggest REIT in Asia based on its estimated S$10.5 billion market capitalisation and the third biggest in Singapore, once completed.