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Moody's cuts CMT's outlook to 'negative' from 'stable' on Westgate acquisition

CREDIT ratings agency Moody's Investors Service on Thursday changed the outlook on all CapitaLand Mall Trust's (CMT) ratings to "negative" from "stable", following CMT's announcement earlier this week that it will acquire the remaining 70 per cent stake in Infinity Mall Trust which holds Westgate.

That said, it has affirmed the A2 issuer and senior unsecured ratings of most of CMT's debt.

Explaining its rationale, Moody's said that the change in outlook to "negative" reflects the likely increase in CMT's debt leverage following the proposed acquisition, which in turn will reduce the headroom within the A2 ratings.

Westgate is the retail component of an integrated development in Jurong, the up-and-coming second central business district of Singapore. However, the mall has been one of the weaker performing malls in CMT's portfolio with negative rental reversions.

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The acquisition, assuming fully funded by debt, will increase CMT's total borrowings by around S$800 million. 

On a pro forma basis, Moody's expects CMT's leverage - measured by adjusted net debt over Ebitda (earnings before interest, taxes, depreciation and amortisation) - to weaken to 6.9 times on a normalised basis, from 5.9 times as of June 2018. This erodes any headroom under the downgrade trigger level of 7.0 times.

Saranga Ranasinghe, Moody's assistant vice-president and analyst, said: "Against the backdrop of weak retail market conditions in Singapore, Moody's believes the negative outlook also reflects CMT's exposure to an increase in retail space and the potential for lower retail rents, which could further weaken its debt leverage."

The manager of CMT has said that the acquisition may be financed through debt or a combination of debt and equity, depending on market conditions. 

Ms Ranasinghe said: "A meaningful equity issuance will be credit positive as it will help to partially correct leverage at CMT, although it will remain weakly positioned for the rating. However, given that an equity issuance is currently not underwritten, Moody's has not factored in any partial correction in the company's leverage profile from such a development."

Moody's added that the outlook could return to stable if CMT improves its debt leverage, such that adjusted net debt/Ebitda recovers well below 7.0 times on a sustained basis and the retail environment improves in Singapore.

But CMT's rating could face further downward pressure if the operating environment deteriorates, leading to higher vacancy levels and a decline in operating cash flow, or if the trust fails to maintain a well-managed debt maturity profile, or if its financial metrics weaken.