Research: Rating Action: Moody’s assigns A2 rating to Link REIT’s proposed convertible bonds

Hong Kong, November 22, 2022 — Moody’s Investors Service has assigned a backed senior unsecured rating of A2 to the proposed convertible bond to be issued by Link CB Limited, an indirect wholly-owned subsidiary of Link Real Estate Investment Trust (Link REIT, A2 stable). The notes are unconditionally and irrevocably guaranteed by Link REIT, Link Holdings Limited and Link Properties Limited.

The rating outlook is stable.

Link REIT plans to use the proceeds from the notes to refinance existing obligations and for general corporate purposes.  

RATINGS RATIONALE

“Link REIT’s A2 issuer rating reflects the stability of its core retail property portfolio across economic cycles, its management’s track record of asset enhancements and excellent liquidity,” says Stephanie Lau, a Moody’s Vice President and Senior Credit Officer.

The rating also reflects Link REIT’s high business stability, which is underpinned by the non-discretionary goods and services offered by its tenants and the highly diversified tenant mix in its malls in Hong Kong SAR, China (Aa3 stable).

In addition, the rating incorporates the risks related to Link REIT’s high financial leverage, its concentrated operations in Hong Kong and the trust’s expansion and investment strategy.

The proposed bonds, which Moody’s considers as 100% debt-like, will have no significant impact on the REIT’s credit metrics, as the rating agency expects the trust to use the majority of the proceeds to refinance existing debt. Even if all cash proceeds were to be used for other general corporate purposes, the potential increment in debt from this particular bond issuance will still leave a financial buffer against the REIT’s quantitative downgrade triggers.

Without factoring in Link REIT’s foreign-currency movements, further acquisitions or share buybacks, Moody’s forecasts the trust’s adjusted net debt/EBITDA will increase to 6.3x over the next two years from 6.1x for the 12 months ended September 2022 (LTM September 2022). This expectation is based on assumptions that a growth in net debt will more than offset a modest increase in earnings.

Specifically, Moody’s expects adjusted net debt to increase to around HKD55 billion over the next 12-18 months, from HKD52 billion as of 30 September 2022, mainly to fund outstanding purchase consideration of the announced acquisitions and general working capital.

The rating agency projects Link REIT’s annual earnings will grow at a low to mid-single digit percentage, to about HKD12.2 billion over the next 12-18 months from HKD11.9 billion in LTM September 2022. Stable Hong Kong retail operations, strong car park revenue and higher contribution from newly acquired assets will mitigate near-term weakness from the REIT’s mainland China retail and office properties, and higher general and administrative expenses.

Link REIT’s gross revenue and net property income increased 4.6% and 4.5% to HKD6.0 billion and HKD4.6 billion, respectively, in the first half (H1) of the fiscal year ending 31 March 2023.

On the other hand, Link REIT’s adjusted net debt/EBITDA increased to 6.1x for LTM September 2022 from 5.6x in fiscal 2022, as the increase in net debt outpaced EBITDA growth.

Environmental, social and governance (ESG) considerations have a neutral to low impact on Link REIT’s credit rating. Link REIT has moderately negative physical climate and carbon transition risks, which are offset by its neutral-to-low exposures to social and governance risks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Link REIT’s stable rating outlook reflects Moody’s expectation that the trust will adopt a cautious approach toward its debt-funded acquisitions, which will prevent a material adverse change in its business mix or financial leverage.

An upgrade of Link REIT’s rating is unlikely over at least the next 12-18 months. In the medium term, upward rating pressure could emerge if Link REIT further improves (1) its overall asset quality, (2) rental income scale and stability, and (3) its leverage through a conservative investment strategy.

Downward rating pressure could emerge if (1) Link REIT fails to maintain stable operations, or (2) its business and development risks increase significantly through aggressive debt-funded acquisitions outside of its core operations in Hong Kong, such that its adjusted net debt/EBITDA exceeds 7.0x and its adjusted EBITDA/interest coverage falls below 3.0x-3.5x on a sustained basis.

The principal methodology used in this rating was REITs and Other Commercial Real Estate Firms published in September 2022 and available at https://ratings.moodys.com/api/rmc-documents/393395. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Link Real Estate Investment Trust listed on the Hong Kong Stock Exchange on 25 November 2005 as part of a divestment exercise by the Hong Kong Housing Authority. It operates an internal manager model that aligns the interests of unit holders and creditors. As of 30 September 2022, the trust had 152 investments across sectors, including retail, logistics, office, car park and related businesses.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

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

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Stephanie Lau
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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