Why bonds could be the next ticking time bomb for developersBy Goola Warden
SINGAPORE (Oct 3): Over $2 billion worth of bonds will be maturing in 4Q16, and
another $9 billion in 2017.Of that figure, local property developers and real estate investment trusts (REITs) account for 75% of the bonds maturing in 4Q16 and 40% of those maturing in 2017, according to a report by S&P Global Ratings on Sept 7.
The issue, however, is not with the REITs. Chan Kah Ling, the lead analyst of the S&P report, reckons that REIT debt is manageable.
“REITs, with their stable and recurring cash flows, lower leverage, and large proportion of unencumbered assets, have more financial flexibility than developers,” she notes in the report.
Indeed, she says that property developers face far greater risks, as several
small- and mid-sized developers have taken on significant amounts of debt in recent years to fund their expansion.
“Cheap funds have translated into increased leverage, and impaired balance sheets. Leverage of domestic currency bond issuers within the sector has grown rapidly, with the median ratio of gross debt-to-Ebitda crossing 11 times for the past three years,” Chan writes.
In addition, interest coverage ratios have been declining in tandem with the rising leverage, according to Chan. “This exposes developers to potential increases in interest rates going forward,” she notes.
Interest coverage is defined as earnings before interest, tax, depreciation and amortisation (Ebitda) divided by interest expenses. The debt-to-Ebitda ratio is an indicator of the number of years it would take for a company to pay off its debt.
S&P does not name any specific developers in its report. However, there are at least 15 locally listed property developers with market capitalisations of less than $1 billion to $1.1 billion that have outstanding bonds, according to data from Bloomberg.
Of these, eight could have gross debt-to-Ebitda ratios of more than 11 times by this year-end. At least four are likely to have gross debt-to-Ebitda ratios of more than 20 times by the year-end.
Source: The Edge
http://smr.theedgemarkets.com/article/w ... 3-87358173
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