Moody's downgrades CMT to A3; upgrades CCT to Baa1

MOODY'S Investors Service on Thursday downgraded the issuer and senior unsecured ratings of CapitaLand Mall Trust (CMT) to A3 from A2, while upgrading the issuer rating of CapitaLand Commercial Trust (CCT) to Baa1 from Baa2.

The credit rating agency has also downgraded CMT MTN's senior unsecured ratings to A3 from A2. CMT MTN is a wholly-owned subsidiary of CMT.

In addition, Moody's has downgraded the backed senior unsecured multicurrency medium-term note programme ratings of the notes issued by CMT MTN to (P)A3 from (P)A2, and done the same for the senior unsecured rating on the retail bond programme issued by CMT.

The outlook on all of CMT's ratings has been changed to negative from rating under review, Moody's noted.

The ratings actions come after the extraordinary general meetings of both trusts and CCT's trust scheme meeting on Sept 29 where unitholders voted in favour of the proposed merger between the two. The merger is to be effected through the acquisition by CMT of all the issued and paid-up units in CCT, with the transaction expected to close by November.

"The downgrade reflects our expectation that CMT's credit metrics will weaken and remain at levels no longer consistent with its A2 rating, driven by the merger with CCT, which has a weaker leverage profile," said Moody's analyst Tan Junling. This is coupled with the incurrence of around S$1 billion in incremental debt to fund the merger's cash consideration, added Ms Tan.

The A3 rating also takes into account the enlarged entity's more diversified portfolio, balanced exposure across integrated developments, retail and office assets, as well as a reduction in the trust's asset concentration risk, Moody's noted.

Meanwhile, the negative outlook reflects the uncertainty surrounding the extent of the coronavirus-related disruption and its impact on the earnings and performance of retail properties, and CMT's long-term financial policy and business strategy, Moody's said.

On a pro forma basis, the credit rating agency expects CMT's adjusted net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) to weaken to 9.6 times in 2020 and 10 times in 2021, before gradually recovering to around nine times in 2022. The deterioration is caused by the incremental debt to fund the merger and the decline in Ebitda due to the Covid-19 disruption, Moody's said.

As for CCT, Moody's has upgraded CCT MTN's backed senior unsecured debt ratings to Baa1 from Baa2. It has also upgraded the backed senior unsecured medium-term note programme ratings of the notes issued by CCT MTN to (P)Baa1 from (P)Baa2.

The outlook on all of CCT's ratings has been changed to stable from ratings under review, Moody's said.

Added Ms Tan, who is also Moody's lead analyst for CCT: "The upgrade reflects our expectation that CCT will reduce its leverage following the merger such that it will be able to maintain its current credit profile despite the transfer of assets to the enlarged CMT."

She noted that the upgrade was also due to Moody's expectation of "strong linkages and integration" between the enlarged CMT and CCT after the merger. Following the merger, CCT will be delisted and will become a private sub-trust of CMT.

Going by Moody's estimates, CCT's adjusted net debt/Ebitda will improve to 8.4 times this year from 9.9 times in 2019.

Given the transfer of assets, the credit rating agency expects that CCT will eventually reduce its debt with a corresponding increase in debt at the enlarged entity. Consequently, Moody's expects CCT to maintain its adjusted net debt/Ebitda of around 10-11 times over the next 12-18 months, it said.

According to Moody's, the stable outlook reflects that CCT will reduce its borrowings in line with the reduction in its assets base over the next 12-18 months. It also takes into account CCT's minimal exposure to tenants in sectors severely affected by coronavirus-related disruptions, such as food and beverage, retail and tourism, Moody's noted.

That said, the liquidity of both CMT and CCT are "inadequate", Moody's added.

As at June 30, CMT's cash and cash equivalents of around S$285 million and undrawn committed facilities were insufficient to cover S$1.44 billion of its upcoming debt maturities over the next 12-18 months on a pro-forma basis, Moody's said.

Meanwhile, CCT's cash and cash equivalents and undrawn committed facilities as at end June were also insufficient to cover its upcoming debt maturities of S$725 million over the next 12-18 months, Moody's added.

Nonetheless, refinancing risk is mitigated by the trusts' track record of access to funding and established banking relationships, Moody's said.

It added that such risk will be mitigated by CMT's "financially strong and committed sponsor" CapitaLand, which is linked to Temasek Holdings with an Aaa stable rating. Meanwhile, refinancing risk for CCT will also be mitigated by its ownership of the enlarged CMT, which is owned by CapitaLand.

Separately, in bourse filings on Thursday night, the managers of CCT and CMT noted that the court hearing to sanction the trust scheme for the proposed merger has been fixed at 4pm on Oct 12.

As at 10.13am on Friday, CMT units were trading at S$1.94, down S$0.01 or 0.5 per cent, while CCT units were flat at S$1.67.