Monday, August 11, 2014

Credit Rating methodology for Reits - how it can help you choose the right investment

The investment community in our globalized world has grown ever so bigger each day and it is easy to see why some investors can get lost when picking their investments.

One tool that can help you decide is the credit ratings assessed by the credit agency. The three top agencies - Moody, S&P and Fitch are the world's top rating agencies which provides assessment on companies accredited ratings. Different rating agencies give you slightly different framework but from the broad view they generally serve the same purpose - the higher your risk profile, the lower your ratings and vice versa.

For the purpose of the post, we will take a look at the framework from Moody in determining the credit rating for Reits listed companies in Singapore.

There are generally 4 main factors used by Moody in analyzing a company's internal and external characteristics. These factors are:

Factor 1 - Liquidity and Funding (24.5%)
Factor 2 - Leverage and Capital Structure (30.5%)
Factor 3 - Market Position and Asset Quality (22.0%)
Factor 4 - Cash Flow and Earnings (23.0%)

Factor 1 - Liquidity and Funding

Under this factor, it covers the ability of the companies to hold ample liquid assets under their books. This includes things like debt maturities, dividend payout ratio and the amount of unencumbered assets.

For instance, under the debt maturities, the higher the amount of weighted debt maturities out of the total debts, the lower will be the ratings.

Factor 2 - Leverage and Capital Structure

This probably takes the highest weightage out of all the four factors and you can see why they have placed a huge importance on leverage assessment.

Under this factor, items such as the gearing ratio and whether the debts are secured or unsecured does play an important factor in assessing the company's ratings.

For Reits, the gearing probably is capped at 45% out of your total assets and if you exceeded this, then you are probably screwed by the MAS regulators.

Factor 3 - Market Position and Asset Quality

This is probably the factors that are most subjective as you really need to assess external environment if your assets are in other locations of the world. Another item that falls under this factor is the company size, so the bigger your total gross valuation of assets the better your credit ratings.

Factor 4 - Cash Flow and Earnings

This factor covers the ability of the company to provide earnings, positive cash flow and cover costs such as the interest coverage ratio.

For instance, the better the company is at covering their finance expenses, the better their credit ratings will be.

These ratings might not be important to you right now but it definitely gives you a checklist to see which areas are companies weak in. As investors, we need to be vigilant on the companies we want to be invested in, lest any weaknesses might upset what happened back then during the gfc.


  1. Hey B!

    Nice informative post! My opinion is that while these 'ratings' do include a lot of vital factors, they are useless alone to use for investment for the long-term.

    First, is the yield payout ratio; a REIT is near useless if it has an atrocious payout on dividends since capital gains are rare.
    Second is the value of the capital; if it is extremely overvalued to the extent that it would never grow anymore, risk investing before its revaluation is surely a bad move!
    Third, the management team; just not sure why this is not included as part of the ratings?
    Fourth, the prospects of the REIT in near future (not current assets' value/quality); having great quality assets are good, but if the REIT does not seem to find ways to grow itself, I will be doubtful and get insomnia, turning return profits into medical loss!
    Maybe to rephrase better, these ratings should only be the thing to check with whether the REIT will be delisted in near future? :/

    Nonetheless, I elucidate that I do not have any practical experience in investing REIT yet, above are my opinion from my knowledge and read-ups so do let me know how you feel about my opinion. And I really can't wait to invest in one soon! :)

    Lastly B, just to let you know that I had put you in my Links page ( as I felt that this blog is definitely something all my readers should and would want read about!

    The Independent Abecedarian

    1. Hi TIA

      Thanks for your valuable inputs.

      I think you are right in saying that this info alone is useless, but it can serve as a purpose of checklist for potential corporate governance issue. For e.g if capmalltrust is having an A minus ratings surely they hv done something which is better than others.

      I suspect this may not only be for reits but other company as well. I may be wrong here and compliance to this ratings can really serves the company well for exposure to retail or institutions investors.

      Management isnt included I suspect its because its really subjective more than anything and it is up to the board of directors and shareholders to pick them really. So these ratings cant do anything about it.

      Regarding growth for the reits if you look almost at all the reits listed here they are almost growing already in fact a bit too fast for my liking. I dont know if there ever will be a bubble in all this. Just look at their rental reversion for example for retail malls every year and you can understand why.

      Thanks for all the comments and the link to your blog. I will put a link as well to your blog as I think they are interesting :) will see you around more.

  2. Hi B,
    Great info, thanks. Prior to this post, Rating is definitely not my key selection criteria. Now I will pay more attention.

    Do you recall in S-Reit if there is any A of C ratings?

    1. Hi Rolf

      If I recall I think reits like capmalltrust is in the A minus range while most reits falls under the bb ratings. I think below that its considered junk and you are not allowed to obtain certain gearing concessions for example ceiling of 45% etc.

  3. Great information! Thanks for the sharing.


  4. Hi David

    You are welcome :)

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