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Rating Action:

Moody's affirms CapitaLand Commercial Trust's A3 ratings; changes outlook to negative

03 Jun 2016

Singapore, June 03, 2016 -- Moody's Investors Service has affirmed CapitaLand Commercial Trust's (CCT) A3 issuer rating.

Moody's has also affirmed the A3 senior unsecured debt ratings of CCT MTN Pte. Ltd., and the (P)A3 rating of its senior unsecured medium-term note (MTN) program.

At the same time, Moody's has changed the outlook on all ratings to negative from stable.

The change in outlook follows CCT's announcement on 23 May 2016 that it will acquire 60% of a special purpose sub-trust, MSO Trust (unrated), which owns an office building, CapitaGreen, in Singapore (Aaa stable).

RATINGS RATIONALE

"The change in outlook to negative reflects the likely increase in CCT's debt leverage following the proposed acquisition of CapitaGreen, which in turn will the reduce headroom within its A3 ratings," says Jacintha Poh, a Moody's Vice President and Senior Analyst.

CapitaGreen is a 40-storey premium-grade A office tower in Singapore's central business district.

The acquisition, if completed, will increase CCT's total borrowings by SGD927 million, and is subject to certain conditions, including the receipt of regulatory and unit holder approvals. The transaction is expected to close in Q4 2016.

On a pro-forma basis, Moody's expects CCT's debt leverage post-transaction -- as measured by adjusted debt/deposited assets -- will increase to 37.7% from 30.4% as of 31 March 2016, which is close to the downgrade trigger level of 40%.

Against the backdrop of slowing economic growth in Singapore, Moody's believes the negative outlook also reflects CCT's exposure to weakening office space demand and the potential for lower property valuations, which could further increase its debt leverage.

Furthermore, CCT's debt leverage measured from its earning capacity -- adjusted debt/EBITDA -- will be high relative to its A-rated global peers.

The CapitaGreen acquisition will raise CCT's adjusted debt/EBITDA to around 9x on a normalized basis, significantly up from the 7.0x-8.0x level that had supported the trust's ratings in the last 5 years.

CCT's A3 issuer rating reflect its strong market position in Singapore, good franchise value and well-known brand name due to its strong sponsor, CapitaLand Limited (unrated). More importantly, the trust generates stable and recurring income from its portfolio of high-quality and centrally-located assets in Singapore, which have a high quality tenant base and healthy occupancy rates.

The rating also considers CCT's strong track record of accessing funding through both the debt and equity markets, and its manageable refinancing risk thanks to its proactive capital management.

However, the rating is constrained by the inherent liquidity risks associated with Singapore real estate investment trusts (REITs) as a result of their high dividend payout ratios and minimal cash balances.

Against such constraint, CCT has proactively managed its liquidity position. The company completed a refinancing exercise in April 2016, has no debt maturing in 2016 and had undrawn committed bank credit facilities of approximately SGD550 million as of 31 March 2016. Moody's expects the trust will incur a low level of capital expenditures in 2016 which it can well accommodate with its undrawn bank credit facilities.

Given the negative outlook, upgrade pressure is unlikely.

However, the outlook could return to stable if CCT improves its debt leverage, such that its adjusted debt/total deposited assets recovers to its historical average level over the past 5 years.

On the other hand CCT's ratings could be downgraded if: (1) the operating environment deteriorates, leading to higher vacancy levels and declining operating cash flows; and/or (2) the trust's financial metrics weaken, with adjusted debt/total deposited assets exceeding 35%-40%, adjusted EBITDA interest coverage falling below 3x, and adjusted secured debt/total deposited assets exceeding 15% on a sustained basis.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

MSO Trust was formed in 2011 with three joint-venture partners -- CCT (40% share), its 32%-sponsor CapitaLand Limited (unrated, 50%), and Mitsubishi Estate Asia (unrated, 10%) -- to redevelop Market Street Car Park into CapitaGreen.

CapitaLand Commercial Trust (CCT) is a Singapore-focused Real Estate Investment Trust, listed on the Singapore Exchange Securities Trading Limited on 11 May 2004. As of 31 March 2016, it had a portfolio of 10 commercial properties, including a 60%-interest in Raffles City and a 40%-interest in CapitaGreen, with a total appraised value of SGD7.5 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jacintha Poh
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms CapitaLand Commercial Trust's A3 ratings; changes outlook to negative
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