What you need to know about SREITs' refinancing risks

Are the risks still manageable or are they getting out of hand?

According to a release, Singapore Real Estate Investment Trusts, or S-REITs', liquidity profiles remain weak, but refinancing risks are manageable, Moody's Investors Service says in a Special Comment.

"While Singapore Real Estate Investment Trusts (S-REITs) generally have stable and recurring cash flows, their liquidity profiles remain weak as a result of high distribution to unitholders, prompting a focus on refinancing risk," says Alvin Tan, Analyst in Moody's Corporate Finance Group and co-author of the report.

"Liquidity and refinancing are the main risks facing our rated S-REITs," says Tan. "While the total due to mature in the 24 months from 31 December 2011 is lower than it was over the same period as of 31 December, 2010, S-REITs are still exposed to refinancing risks due to their high reliance on debt financing. These risks are exacerbated by current economic uncertainties and the resultant tightening of bank lending." But Moody's says that, given the past track record of rated S-REITs in raising equity, it believes that access to capital markets will remain strong.

Moody's says benign interest rates and ample liquidity in the market have enabled S-REITs to actively manage their debt maturity profiles over the past two years. This will mitigate imminent refinancing risks, especially in light of current macro-economic uncertainties.

Tan says S-REITs are increasingly using unsecured debt financing, which provides greater financial flexibility when refinancing and provides a higher recovery in the event of default. "However, the financial flexibility of S-REITs may still be constrained, as borrowing terms usually include restrictive covenants, such as negative pledges on existing unencumbered properties," adds Tan. "We believe investment-grade rated trusts will continue the trend of unencumbering assets, but this may reverse if the difference between secured and unsecured interest
rates widens materially."

"Funding risks for large development projects are limited, even if the macro-economic situation worsens," says George Teng, Associate Analyst and co-author of the report. "This is because most funding needs are secured and supported by strategic partnerships and strong banking relationships."

Further deterioration of the European debt crisis and ongoing deleveraging of European banks could heighten concerns over trusts with significant exposure to Europe. However, Teng says these trusts' balance sheets remain healthy while access to capital markets remains available.