THE Monetary Authority of Singapore (MAS) on Wednesday (Jul 24) published a consultation paper proposing to simplify leverage requirements for all real estate investment trusts (Reits).
Under the proposal, all Reits will be subject to a minimum interest coverage ratio (ICR) threshold of 1.5 times, and an aggregate leverage limit of 50 per cent.
Commenting on the proposed ICR, the regulator said: “This underscores the responsibility of Reit managers in ensuring that Reits can adequately meet their interest payments.”
Currently, the ICR requirement of 2.5 times is to be met only by Reits which intend to increase their aggregate leverage from 45 per cent to 50 per cent.
The ICR and aggregate leverage work complementarily to indicate a Reit’s financial strength, said MAS.
The ICR is a measure of how well a company can repay the interest on its debt, while the aggregate leverage refers to the ratio of a Reit’s total debt to total assets. The aggregate leverage, also known as gearing ratio, indicates a company’s ability to take on more debt.
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To simplify the requirements, MAS is proposing that a single aggregate leverage limit of 50 per cent apply to all Reits going forward. Currently, Reits should not have an aggregate leverage exceeding 45 per cent of the funds’ deposited property.
“A leverage limit of 50 per cent, together with the ICR floor, will continue to foster prudent borrowing by Reits,” said the authority.
The proposals, which are available in a consultation paper published on MAS’ website, come as the high interest rate environment has been punishing for locally listed Reits amid rising finance costs and valuations coming under pressure.
MAS is also proposing that Reits perform and disclose sensitivity analyses on the impact of changes in earnings before interest, taxes, depreciation, and amortisation, as well as interest rates on their ICRs.
This disclosure should be made in their interim and financial results and annual reports to provide investors with information on how a Reit’s credit profile could be affected by changes in market conditions, said MAS.
The full consultation paper is available on MAS’ website. Interested parties can submit their views on the proposals online by Aug 23, 2024.
