November 16, 2015 / 4:58 AM / 2 years ago

Fitch: Thai REIT Bonds Ease Rate Risk, But May Reduce Duration

(The following statement was released by the rating agency) BANGKOK, November 15 (Fitch) The ability of Thai real estate investment trusts (REITs) to issue bonds will not only provide multiple sources of capital but also help reduce interest costs, says Fitch Ratings. The likely shorter maturities, however, counterbalance these benefits. In addition, subordination issues may arise for some REITs if unsecured bonds are issued to partially refinance the existing secured bank loans. The current regulations allow Thai REITs to carry debt, although the particular aspects governing the issuance of bonds by REITs are not yet in place. The new regulations are likely to come into effect by end-2015 or early 2016, after a long delay from end-2014. Bank loans have been the sole debt-financing source for all Thai REITs, with interest rates all on a floating basis. Fitch expects the probability of a rate rise over the next six months as low, given the continuation of government's policy to stimulate the weak local economy. However, it is now more likely that rates will rise beyond that six-month period. If the regulations come into place as expected, Fitch sees the issuance of REIT bonds as likely over the next 12 months - for both new investment and refinancing - mainly to capture a low fixed rate. The attraction of reducing interest-rate risk exposure is counterbalanced, however, by the likelihood of shorter debt maturity profiles. The refinancing risk of Thai REITs over the next two to three years is low, given that their loan maturities are mostly beyond 10 years with a grace period on the principal from three to five years. Replicating their existing debt maturity profile, especially with issuance of bonds with a maturity of 10 years or longer, should require a very high interest cost, given an expected upward trend of interest rates after the next six months. Fitch deems it unlikely that the REITs will sacrifice such a high cost. Therefore, the average debt maturities of some REITs after issuing bonds may be shorter than their existing bank loan maturities. Four of the six existing REITs have bank loans secured by their investment properties. If these REITs choose to issue unsecured bonds to partially refinance their bank loans, the unsecured bondholders could be subordinated to the secured bank lenders. However, the subordination could be insignificant for some REITs, given the low-to-moderate financial leverage of Thai REITs. The current REITs have an average loan-to-value (LTV, net debt to investment properties) of about 18%. Fitch expects the overall average LTV to rise to 22%-24% by end-2015 with a relatively more aggressive financing policy of industrial REITs - for which the LTV is likely to be 25%-30%. The six REITs have a total market capitalisation of about THB35bn, and investment properties of about THB41bn. Another four are likely to be launched by the end of this year, while the first capital increases from the two existing REITs are likely to be made. Therefore, the total market capitalisation of Thai REITs should be about THB55bn-60bn by end-2015. The total investment properties of all REITs is likely to be more than THB70bn, up from THB34bn at end-2014. The largest segment will be the industrial REITs, with four REITs representing 41%-42% of total assets; followed by an exhibition centre REIT, the largest REIT in Thailand, accounting for 26%-27%; and two office REITs with 16%-17%. Contacts: Somruedee Chaiworarat Director +662 108 0160 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road, Lumpini, Patumwan, Bangkok 10330, Thailand Nichaya Seamanontaprinya Associate Director +66 2108 0161 Vicky Melbourne Senior Director Head of Industrials South East Asia and Australasia Ratings +61 2 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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