Sabana Industrial REIT's manager announced it is considering the requisition of an EGM by Quarz Capital Asia made on June 7, and is seeking legal advice. In an announcement on June 22, Sabana REIT's manager highlighted some of the risks involved during the internalisation process, some of which have been explored by The Edge Singapore previously, in particular the financial covenants, and regulatory approvals.
The new internal manager will need a CMS licence, and to be approved by the Monetary Authority of Singapore (MAS). While getting a CMS licence is straightforward, costs will be incurred in setting up the internal manager even before the approval process.
Much of the stability for the REIT depends on whether Quarz Capital Asia has the new financiers lined up. Investors have openly expressed concern about the change of control covenant.
"It is common for banks to impose restrictions on the removal of the REIT manager in REIT loans in Singapore, and the inclusion of the Removal of Manager Clause in Sabana Industrial REIT’s loan agreements was not at the Manager’s request. Unitholders should note that there could therefore be serious consequences for Sabana Industrial REIT and its Unitholders arising from its existing financing arrangements if the Manager is removed. The removal of [the current] manager of Sabana Industrial REIT would trigger the Removal of Manager Clause and is a review event under various loans of Sabana Industrial REIT. If triggered, this may result in mandatory prepayment by Sabana Industrial REIT of its outstanding loans and interest if no satisfactory agreement is reached with the lenders following the review event," the manager says in its announcement.
Separately, a REIT manager says Quarz may have already spoken to existing banks to get the waiver for the clause, or have in place standby facilities. "Typically, change of control will allow the bank to call back the loan. If the REIT is not able to have another loan ready, the REIT will be in default. Then each loan will trigger a cross default against all the REIT's loans. In M&A situations, all these documents will be agreed upon and announced before the EGM, usually in the requisition notice for the EGM," the unnamed REIT manager said.
As such, the announcement by Sabana REIT's manager on June 22 suggests that Quarz's proposed resolutions are incomplete. "Quarz has not put forth clear strategies, a detailed roadmap with timelines or specific proposals to successfully effect the internalisation of the management function of Sabana Industrial REIT. Quarz has not assured Unitholders that their proposals are viable, and will not destroy value in the potentially unstable transition should the Manager be removed," the announcement says.
