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Frasers Centrepoint Ltd Wants To Borrow Another US$200 Million Soon: What Does This Mean For Investors?

Frasers Centrepoint Ltd (SGX: TQ5), a major property developer in Singapore, has been expanding its business aggressively over the past few years.

That expansion has been mainly fueled by debt. Frasers Centrepoint ended fiscal 2013 (fiscal year ended 30 September 2013) with total borrowings of S$3.0 billion, according to data from S&P Global Market Intelligence. This number has since grown to S$10.7 billion as of 31 March 2016, giving Frasers Centrepoint a net debt to equity ratio of 89.1%.

The real estate company also currently has an interest coverage ratio ( calculated as EBIT divided by interest expense) of just 5.

Yesterday evening, the company announced that it is planning to issue US$200 million worth of fixed rate notes. The notes would mature on 21 July 2021 and would be part of the S$3.0 billion Multicurrency Debt Issuance Programme Frasers Centrepoint set up in 2012.

Local banking giant Oversea-Chinese Banking Corp Limited (SGX: O39) has been appointed as the notes’ sole lead manager and book runner; in other words, OCBC is in charge of helping Frasers Centrepoint with the issuance of the notes.

Interestingly, even though Frasers Centrepoint has a rather high amount of debt on its balance sheet (given its net debt to equity and interest coverage ratios), it is still able to price the notes at an annual interest rate of just 2.5%.

I see this as one of the strong suits of Frasers Centrepoint. The company has been very capable in negotiating favourable interest costs for itself as well as other entities under its corporate umbrella.

For example, Frasers Centrepoint Trust (SGX: J69U) – which is sponsored, managed, and partially owned by Frasers Centrepoint – has one of the lowest financing costs amongst retail real estate investment trusts listed in Singapore. Frasers Centrepoint Trust currently has a cost of debt of just 2.3%.

According to the announcement on the fixed rate notes, Frasers Centrepoint plans to use the proceeds for general corporate purposes such as the refinancing of existing debt, paying for investments, and for other general working capital needs.

Although Frasers Centrepoint is able to refinance its debt at a favourable interest rate right now, investors have to understand that there are still risks that come with having a high level of debt.

As long as the company is able to refinance its borrowings, it is able to sustain its business. But, if the company has to refinance debt at a time when credit is tight – such as the financial crisis period in 2008 – that is when huge problems may arise.

For now, it is business as usual for Frasers Centrepoint. But, investors should still be aware of the company’s balance sheet risks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in Frasers Centrepoint.