Net proceeds of S$227.5m will be used to repay early part of the S$370m-DBS term loan at the trust-level. With that, the Basslink acquisition is no longer 100% debt-financed. An in-principle approval for a-S$370m revolving credit facility (RCF) from DBS has been received. The RCF is intended to replace the TLF, with only S$142.5m drawn. While the terms are still being negotiated, the manager does not expect the costs to be more onerous than under the term loan.
The manager estimates net savings of S$4.7m p.a., taking into account interest savings, base management fee, and commitment fee for the RCF (but before any upfront fee). Assuming the rights issue had been completed on 1 Apr 09, the pro forma 1Q10 DPU would have been 1 cts per unit compared to the current 1.75 cts.
With a reduced debt-level and a committed RCF, CitySpring will enjoy greater funding flexibility. The manager said that the RCF could be utilized to fund acquisitions, investments in its Basslink telecoms network, or partially fund the S$200m gas network conversion initiative at City Gas, which could begin in 2H10 and take 5 years to complete (announced at IPO).
Assuming that the distribution guidance is unchanged, we estimate post-rights DPU p.a. at 4.0 cts, offering a yield of 6.3% based on the TERP of $0.63. Our ex-rights target price would be $0.70, implying a total return of 17.3%. The frequency of DPU payment remains (quarterly). We maintain our Buy recommendation with a target price of $0.86.
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