FHT could reap benefits if managers repay 4.45% perps with debt: DBS report

THE decision by Frasers Hospitality Trust (FHT) to redeem all outstanding securities of its S$100 million, 4.45 per cent perpetual securities may lead to a potential uptick in distributions if the managers repay the perps with debt, DBS Group Research said.

This is assuming the stapled group is able to obtain close to its average weighted cost of debt of 2.2 per cent, compared to the potential estimated reset coupon rate of about 3 to 3.2 per cent.

As the stock trades at a "steep discount" to its net asset value (NAV), the report highlighted that it does not expect an equity fund raising to repay the perpetuals as it would be considered a "dilutive exercise". Thus the analyst believes that the managers are likely to repay the perpetual securities with debt.

The research team projects an estimated accretion of about 1 per cent to its FY2021 distribution forecast.

DBS added that an additional debt on the balance sheet of S$100 million will increase the current gearing level from 37.8 per cent in December 2020 to about 42 per cent. While the report acknowledged that the higher gearing might inhibit acquisitions or strategic asset enhancement initiatives (AEI), the reduced financing cost will allow for a leaner operating structure as the repositions to ride through sector headwinds, which is the immediate focus for the stapled group, said the report.

DBS added that if FHT repays the perpetual with debt, it could result in reduced flexibility for the stapled group to tap future perpetual issuances in the longer term. This is because the company will "likely not be accorded equity treatment" from rating agencies such as S&P and Moody's.

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Nonetheless, DBS maintains its view that FHT offers "compelling value". At its current price of S$0.55 per unit, it is trading at 0.85 times its net asset value. The bank expects this would continue to attract market interest as one of the potential privatisation plays within the Singapore stapled groups sector.

FHT will redeem the securities on May 12, when the stapled group will redeem S$250,000 for every S$250,000 in nominal amount of perps, together with distribution accrued to May 11. This includes any arrears of distribution and any additional distribution amounts.

FHT shares closed at 55 Singapore cents on Tuesday, down 0.9 per cent or 0.5 cent.