30 July 2019
From 2 July 2019 to 1 August 2019, the Monetary Authority of Singapore (“MAS”) is seeking feedback to proposals set out in its consultation paper on “Proposed Amendments to the Requirements for REITs”. The proposed changes are intended to provide Singapore’s REITs with more flexibility to manage their capital structure and to streamline the fundraising process for REITs.
Review of leverage limit
Currently, REITs are subject to a leverage limit of 45%. The leverage limit seeks to ensure REITs do not over extend themselves by pursuing highly geared property acquisitions. MAS has received feedback for REITs to be given a higher leverage limit so that they can be more flexible in optimising their capital structure as debt tends to be a cheaper source of capital than equity and takes less time to raise.
MAS is reviewing the leverage limit and the possible approaches to recalibrate the leverage limit. One possible approach is to use a combination of leverage limit and minimum interest coverage ratio (“ICR”). ICR is a measure of a REIT’s ability to service its debt obligations from regular sources of income. This approach encourages REITs to carefully assess their ability to generate sufficient operating income to service interest payments, before they take on additional debt.
MAS is considering the option of allowing a REIT’s leverage to exceed 45% but not more than 50% if the REIT has a minimum ICR of 2.5 times after taking into account the interest payments arising from the new debt (“ICR Threshold”). The leverage limit is not considered to be breached if the REIT’s ICR subsequently falls below the ICR Threshold due to circumstances beyond the control of the REIT manager. However, the REIT should not incur additional borrowings or enter into further deferred payment arrangements.
MAS is also seeking views on whether it is appropriate for a REIT that has demonstrated good financial discipline, such as having a higher ICR Threshold, to be allowed a higher leverage, say 55%.
MAS proposes to make it a requirement for REITs to disclose both their leverage ratios and ICRs in interim result announcements and annual reports. To standardise the computation of the ICR, MAS proposes to define the ICR as earnings before interest, tax, depreciation and amortisation (EBITDA) (excluding effects of any fair value changes) divided by interest expense.
Proposed removal of notification requirements for REITs
MAS is also proposing to streamline the fundraising process for REITs by removing the requirement for REITs to submit a notification to MAS to obtain a “Restricted Scheme” status when they make an offer of units to accredited investors and other investors and seek to reply on the exemption under section 305 of the Securities and Futures Act from the authorisation and prospectus registration requirements. This will make the fundraising process for REITs more efficient, and bring it in line with the fundraising process for companies and business trusts.
The following materials are available on the MAS website www.mas.gov.sg:
- Consultation paper on “Proposed Amendments to the Requirements for REITs” and Annex A
- Annex B Draft Amendments to Regulations