SINGAPORE (April 22): A trio of Singapore industrial real estate investment trusts (REITs) is feeling the fallout from CWT International’s default.
Last September, CWTI borrowed HK$1.4 billion ($241.4 million) from “certain lenders”, according to a company announcement. On April 16, CWTI failed to pay HK$63 million of accrued interests and certain fees to its lenders. Failure to pay constitutes a default and the lenders have asked for the full facility to be repaid. The lenders have further stated that if the outstanding amounts are not repaid by 9am on April 17, they will enforce the security and obtain possession of all charged assets with no further notice to the company and will appoint a receiver and manager over all of the charged assets.
The main security pledged under the HK$1.4 billion facility is CWTI’s 100% stake in CWT. In turn, CWT owns HK$1.2 billion of UK investment properties, US investment properties and China golf courses. These assets were valued at HK$24,604 million and net asset value was HK$5,300 million, as at Dec 31.
CWT also has two Singapore dollar bonds outstanding. A $100 million tranche matures on April 18, after The Edge Singapore goes to print, and a second $100 million tranche matures on Feb 18, 2020. Three industrial REITs are exposed to CWT. Mapletree Logistics Trust announced late on April 16 that CWT had not defaulted on its rental payments under the various lease agreements with MLT and there were no arrears due from CWT as at April 16. CWT and its affiliates are tenants of MLT at five properties: 5A Toh Guan Road East, 4 Pandan Avenue, 6 Fishery Port Road, 38 Tanjong Penjuru and 52 Tanjong Penjuru. Last July, MLT acquired these five ramp-up logistics warehouses from CWT for $778.3 million when the properties’ net property income (NPI) yield was around 6.2%. Following the acquisition, CWT became MLT’s largest tenant. The properties are located in logistics clusters in the western region and near Jurong Port and PSA Terminals. As is normal with industrial rental agreements, MLT has collected security deposits of six months from CWT.
Although CWT has been paying rents promptly, MLT was well aware that CWTI and the broader HNA Group were financially distressed, UOB Kay Hian says in an update.
Thus, MLT has taken precautions. For one thing, about 30% of the leases to CWT are sub-let to third-party end-users under sub-lease agreements. “In the event that CWT is wound up, MLT will take over these sub-leases,” UOB Kay Hian reasons. For the remaining 70% of leases, MLT will refer the end-users (such as Cold Storage) to other third-party logistics providers, which could take over the leases, the local broker suggests.
Who else is affected?
Other REITs with exposure to CWT are AIMS APAC REIT (AA REIT) and Cache Logistics Trust. “From a risk management perspective, however, we observe that most of the affected REITs have been paring down their exposure to CWT in recent years to mitigate ‘over-exposure’ to a single tenant,” says DBS Group Research. The managers of both REITs promptly announced their exposure in terms of gross rental income (GRI) and confirmed that they were reducing their exposure to CWT.
Cache’s manager says, “CWT contributes to 16.5% to the GRI of Cache, down from 20.6% as at Dec 31, 2018; and in the light of the expiry of CWT’s leases, the manager is in a position to negotiate with the end-users as well as other prospective tenants to maintain occupancy.”
ARA Asset Management acquired CWT’s 40% stake in Cache’s manager last year.
And, Cache’s manager confirmed that the weighted average lease to expiry of the CWT leases is less than one year by GRI. “Cache converted its master-leases across various warehouses to multi- tenancies, transacting directly with the underlying tenants instead,” DBS says. “We believe contributions going forward are likely to be even lower post conversion from master lease to multi- tenanted structure for the CWT Commodity Hub in April 2018.”
AA REIT’s manager says, based on AA REIT’s 3QFY2019 GRI, 5.1% of GRI from CWT will progressively expire by March 31, 2020. “AA REIT’s exposure to CWT’s leases will be further reduced due to the expiries of the CWT lease agreements, with the final CWT lease agreement expiring in July 2021,” AA REIT’s manager says.
Implications for bondholders
OCBC Credit Research says in an update that events at CWTI may not trigger cross defaults on the CWT Singapore dollar denominated bonds. “It is worth noting that CWTI has been a troubling parent for CWT, with auditors casting doubt over its ability to continue as a going concern,” OCBC Credit Research says. “Assuming the lenders take possession of CWT, having a new parent is not a bad thing for Singapore dollar bondholders. While we do not have the identity of the lender, they are more likely to be financially driven and hence incentivised to keep CWT’s value as intact as possible,” OCBC Credit suggests.
OCBC Credit believes CWT should still be able to redeem the $100 million bonds due on April 18, although events at CWTI may complicate the redemption process. Also, in addition to the portfolio sold to MLT, CWT still has assets, including a logistics facility valued at $438 million as at Sept 9, 2017, OCBC Credit says.
CWTI’s announcement pointed out that in the event that CWTI’s lenders take over CWT, operations could be affected. Furthermore, it mentioned that in the event that the shares in CWT are sold, a change of control of CWT could occur, leading to a subsequent breach of covenants and cross default. “Should the relevant lenders under the facility agreement proceed to take enforcement actions… in the respective holding companies of CWT, operations… will be considerably impacted and the sale of such shareholding [of CWT] will result in the change of control of CWT, which may in turn cause the covenants in certain loan facilities of CWT and its subsidiaries to be breached and resulting in cross defaults of those loan facilities,” the CWTI statement says.
Whatever the case, the REITs may be relatively insulated. In the event that CWT defaults, with its six-month security deposits, MLT should have sufficient time to find new tenants. “MLT should not have difficulty reletting the properties to replacement tenants,” says UOB Kay Hian. It retains a “hold” recommendation on the stock.
This story appears in The Edge Singapore (Issue 878, week of Apr 22) which is on sale now. Subscribe here
