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S&P withdraws rating upon Sabana Reit's request, after downgrading it to BB+

S&P Global Ratings had downgraded its long-term corporate credit rating on Sabana Shari'ah Compliant Reit to "BB+" from "BBB-" with stable outlook, only to withdraw all ratings of Sabana upon the Reit's request.

Explaining the rationale of the downgrade, Standard & Poor's said that the Reit's balance sheet has weakened on prolonged difficult industry conditions.

Its base-case expectation is that Sabana's ratio of funds from operations (FFO) to debt will be 7-9 per cent for the next 12 months as negative rental reversions and a higher cost of borrowing reduce its profitability.

"Lumpy lease expiries since November 2013 coincided with an industry downturn with declining capital values and expanding capitalisation rates in the industrial space in Singapore," its analysts said in a note.

"Still, we recognise that the management has sound financial discipline whereby leverage, as defined by the ratio of total debt to total assets, has been consistently kept below 40 per cent since the Reit's listing."

The temporary peak of 41.7 per cent as at Dec 31, 2015, arising from significant valuation loss, was quickly brought down to below 40 per cent in the first quarter of 2016.

S&P added that the downgrade also reflects Sabana's limited headroom under one of its covenants measured by total assets.

But the stable outlook at the time of withdrawal reflected S&P's view that Sabana would take creditor-friendly measures to preserve its balance sheet strength, such that the FFO-to-debt ratio would be above 7 per cent over the next 12 months.