Moody's: S-REITs refinancing risks remain manageable

KUALA LUMPUR (Feb 15): The liquidity profiles of Singapore Real Estate Investment Trusts (S-REITs) remain weak, but refinancing risks are manageable, according to Moody's Investors Service.

In a report entitled "S-REITs' Refinancing Risks Remain Manageable" released on Wednesday, Moody's said that while S-REITs generally had stable and recurring cash flows, their liquidity profiles remained weak as a result of high distribution to unitholders, prompting a focus on refinancing risk.

Alvin Tan, Moody's Corporate Finance Group analyst and co-author of the report, said liquidity and refinancing were the main risks facing its rated S-REITs. "While the total due to mature in the 24 months from Dec 31, 2011 is lower than it was over the same period as of Dec 31, 2010, S-REITs are still exposed to refinancing risks due to their high reliance on debt financing.

"These risks are exacerbated by current economic uncertainties and the resultant tightening of bank lending," he said.  

However, Moody's said that given the past track record of rated S-REITs in raising equity, it believes that access to capital markets would remain strong.

Moody's said benign interest rates and ample liquidity in the market have enabled S-REITs to actively manage their debt maturity profiles over the past two years.

This would mitigate imminent refinancing risks, especially in light of current macro-economic uncertainties, it said.

Tan said S-REITs were increasingly using unsecured debt financing, which provided greater financial flexibility when refinancing and provides a higher recovery in the event of default.

"However, the financial flexibility of S-REITs may still be constrained, as borrowing terms usually include restrictive covenants, such as negative pledges on existing unencumbered properties," said Tan.

"We believe investment-grade rated trusts will continue the trend of unencumbering assets, but this may reverse if the difference between secured and unsecured interest rates widens materially."

Meanwhile, Moody's associate analyst and co-author of the report George Teng said funding risks for large development projects were limited, even if the macro-economic situation worsened. "This is because most funding needs are secured and supported by strategic partnerships and strong banking relationships.

"Further deterioration of the European debt crisis and ongoing deleveraging of European banks could heighten concerns over trusts with significant exposure to Europe," he said.

However, these trusts' balance sheets remain healthy while access to capital markets remains available, Teng said.