Ratings views on AREITs, Macquarie and the NBN

Further to its review of the Australian real estate investment trust (AREITS) sector the week before last and subsequent ratings actions, Standard & Poor's released another report last week examining the refinancing challenge that many AREITS now face.

The report notes that about 28 per cent of the rated AREIT sector's $45.1 billion of maturing debt is scheduled to be refinanced by the end of 2010. This significant near-term refinancing task comes at a difficult time for the sector, which is already battling a contraction in available funding, as well as the adverse effects of deteriorating economies and lower asset valuations, says S&P.

"Although credit quality for the majority of our rated AREITs is unlikely to come under further pressure in the near term, the sector's maturing debt in 2010 - combined with the potential for decelerating rental growth for most property types - has accentuated our concerns for AREITs with large capital needs," credit analyst Craig Parker said. "In our view, the debt tenor remains too short for some of the rated AREITs, exposing them to lumpy rollover tasks, adverse mark to market of fixed-rate debt, and asset valuation decrements, which heighten our attention to the potential for breaches of debt covenants."

Fitch Ratings took a look at the direct impact Macquarie Group Limited's exposure to toll-road operator BrisConnections may have on its profitability and capital positions and determined that, even in the worst-case scenario, the exposure appears to be manageable.

Fitch noted that Macquarie's exposure to BrisConnections is three-fold: firstly, it provides a $325 million bridging loan to BC; secondly, it acts as joint underwriter on two unpaid instalments (totalling $390 million per instalment) on units in BC; and thirdly, it currently owns 8.06 per cent of outstanding BC units.

Fitch's analysis suggests that in the worst-case scenario - where the instalments are fully underwritten and Macquarie's investment in BC is written down to zero - there would be a $295 million negative impact on profit in fiscal 2010. The impact on capital would be lower, at a maximum of $160 million.

Given Macquarie reported capital surplus to regulatory requirements of $2.9 billion at the end of December 2008, it would appear this scenario would be manageable for the group. Fitch stressed that this is a worst-case scenario and in reality any capital impact is likely to be less significant.

Moody's Investor Service announced its assessment of the likely impact on Telstra of the Australian government's new national broadband network plan. Moody's sees termination of the bidding process to build the NBN as being neutral for Telstra's (A2/negative) ratings and puts the carrier back in contention to re-start negotiations with the government under the newly announced government-owned NBN framework.

"At the same time, the government's discussion paper on regulatory reform of the telecommunications sector and the broad terms of the request-for-comment, directly open up the prospect of a range of possible reforms of the wholesale network and the real possibility of an increased level of separation of the incumbent carrier," said Moody's.

Moody's has previously flagged its concerns should Telstra be subject to intensified regulatory intervention and this latest announcement could lead to further steps along this path. Telstra's negative rating outlook partly captures these concerns.

Moody's says it will look closely at the outcome of the request-for-comment and the final determinations of government, including the degree to which Telstra's current state of vertical integration may be significantly altered through new regulations; any material changes to existing pricing and price controls; and any changes to Telstra's requirements under its universal service obligation commitments.

Fitch observed that the government's decision to undertake the rollout of the NBN and signalling of future regulatory reform has a mixed impact for Telstra and for SingTel Optus. Telstra was excluded from the bidding process in December 2008 but now can potentially participate in the new project. As for SingTel Optus, Fitch had been concerned about the significant capital investment that may have been required; that concern has now dissipated.

Fitch anticipates that the government's NBN announcement, combined with the biggest reform of the regulatory regime in two decades, will fundamentally transform the competitive landscape of the Australian telecommunications sector. Although the implications may be positive for Optus and the broader industry, the government's announcement has the potential to negatively impact Telstra's business and financial profile over time. That said, given that the government's proposed rollout plan is not to be completed until 2018, Fitch expects minimal impact on Telstra's financial metrics in the medium term.