Risk & Capital Management

(1) Risk Management
Effective enterprise-wide risk management is a fundamental part of CMT’s business strategy. The potential risks are identified and key controls to mitigate these risks are established to protect Unitholders’ interests and value.

Key Risks & Control Measures
Operational Risk
To mitigate and manage operational risks, CMT Group has integrated risk management into the day-to-day activities across all functions. These include planning and control systems, group-wide guidelines, information technology systems, and operational reporting and monitoring procedures involving the executive management committee and Board of Directors. The risk management system is regularly monitored and examined to ensure effectiveness.

The risk management framework is designed to ensure appropriate processes and procedures are in place to prevent, manage and mitigate any operational risk.

Investment Risk
One of the main sources of growth for CMT Group is the acquisition of properties and asset enhancement initiatives (AEI). The risks involved in such investment activities are managed through a rigorous set of investment criteria which includes yield accretion, rental sustainability, growth potential, CMT’s portfolio fit and market catchment. The key financial projection assumptions are reviewed and sensitivity analyses are conducted on key variables.

The potential risks associated with proposed projects and the issues that may prevent their smooth implementation or projected outcomes are identified at evaluation stage. This enables us to determine actions that need to be taken to manage or mitigate risks as early as possible.

Interest Rate Risk
The Group’s exposure to changes in interest rates relates primarily to interest-bearing financial liabilities. Interest rate risk is managed on an ongoing basis with the primary objective of limiting the extent to which net interest expense could be affected by adverse movements in interest rates. CMT Group proactively seeks to minimise the level of interest rate risk by locking in most of its borrowings at fixed interest rates. As at 31 December 2009, the risk is minimal as 94.3% of its borrowings are based on fixed rates.

Currency Risk
As the assets of CMT Group are currently based in Singapore, there is little or no foreign exchange exposure from operations. CMT borrows in Singapore dollars from a special purpose vehicle, Silver Maple Investment Corporation Ltd (Silver Maple). RCS Trust, for which CMT has a 40.00% interest, borrows in Singapore dollars from another special purpose vehicle, Silver Oak Ltd (Silver Oak). Both Silver Maple and Silver Oak issued foreign denominated notes at floating rates and are able to obtain attractive spreads by borrowing from overseas markets. They were swapped into fixed rates and Singapore dollars.

There is no foreign exchange risk from the S$2.5 billion Multicurrency Medium Term Note Programme (CMT MTN programme) as the loans on-lent to CMT are in Singapore dollars.

Credit Risk
Credit risk is the potential earnings volatility caused by tenants’ inability and/or unwillingness to fulfill their contractual lease obligations, as and when they fall due. There is a stringent collection policy in place to ensure that credit risk is minimised. Other than the collection of security deposits, which amount to an average of three months’ rent in the form of cash or bankers’ guarantee, CMT Group also has a vigilant monitoring and debt collection procedures. Debt turnover of CMT Group as at 31 December 2009 of 2.8 days has marginally improved, compared with 3.3 days as at 31 December 2008.

Liquidity Risk
CMT Group actively monitors its cash flow position to ensure that there are sufficient liquid reserves in terms of cash and credit facilities to finance its operation. The Group diligently monitors and observes bank covenants for borrowings.

Financing Risk
The global financial crisis that began in the third quarter of 2008 severely reduced liquidity. During the year, loans backed by real estate became increasingly difficult to obtain, and where obtainable, rates have increased and terms have become more onerous. Despite the macro conditions, CMT weathered the crisis, strengthened its balance sheet and enhanced its financial fl exibility through the issuance of 1,502,358,923 rights units pursuant to a underwritten renounceable 9-for-10 rights issue (Rights Issue).

CMT will continue to proactively manage its capital structure by spreading out its debt due for refinancing for each year to a manageable size and maintaining an optimal gearing level.

  1. Based on the principal amount of the CB due 2013. The final redemption price upon maturity on 2 July 2013 is equal to 109.31% of the principal amount. The CB may be redeemed in whole or in part, at the option of the bondholders on 2 July 2011 at 105.43% of the principal amount.
  2. CMT’s 40.00% interest in RCS Trust.

(2) Capital Management
On 2 April 2009, CMT raised net proceeds of approximately S$1.2 billion from the Rights Issue which were used principally to repay bank borrowings due in 2009 and to pay for committed AEI, with the balance to be used for general corporate and working capital purposes.

Under the facility agreement between Silver Maple and CMT, Silver Maple has granted and loaned CMT a total term loan facility of S$908.0 million. This was after CMT repaid S$335.0 million term loan under the facility on 2 August 2009.

During the Financial Year (FY) ended 31 December 2009, CMT repaid S$80.0 million unsecured term loans from CMT MTN Pte. Ltd.(CMT MTN). As at 31 December 2009, total borrowings from CMT MTN amounted to S$315.0 million. CMT MTN is a wholly-owned subsidiary of CMT which provides treasury services, including on-lending to CMT the proceeds from issuances of notes under an unsecured multicurrency medium term note programme.

CMT has a 40.00% interest in RCS Trust. Under the facility agreement between Silver Oak and RCS Trust, Silver Oak has granted a total facility of S$1,030.0 million, consisting of a S$866.0 million term loan and a S$164.0 million Revolving Credit Facility (RCF). RCS Trust drew down the S$866.0 million term loan in September 2006 and as at 31 December 2009, S$59.0 million has been drawn down from the RCF. CMT Group’s 40.00% interest thereof is S$346.4 million and S$23.6 million of term loans and RCF respectively.

In summary, the total borrowings of CMT Group as at 31 December 2009 was S$2,243.0 million, with gearing at 30.5%. The gearing has been significantly reduced due to the repayment of the loans due in 2009 from the net proceeds of the Rights Issue.

The loan maturity profi le for CMT Group as at 31 December 2009 was as follows:

As at 31 December 2009, 19.6% or S$440.0 million of CMT Group’s debt will mature in 2010. CMT has sufficient internal resources and existing bank facilities to cover the repayments due in 2010. The Manager of CMT will continue to adopt a rigorous and focused approach to capital management.

Average cost of borrowing for CMT Group for the FY ended 31 December 2009 has increased slightly to 3.50% per annum compared with 3.40% per annum for the FY ended 31 December 2008 mainly due to repayment of the loans upon maturity which have lower interest rates.

Cash Flows and Liquidity
CMT Group takes a proactive role in monitoring its cash and liquid reserves to ensure adequate funding is available for distribution to the Unitholders as well as to meet any short-term liabilities.

  1. CMBS means Commercial Mortgage Backed Security.
  2. CMT’s 40.00% share of CMBS debt taken at RCS Trust level to part finance the Raffles City Singapore acquisition. Of the total CMBS of S$866.0 million, S$136.0 million (CMT’s 40.00% share thereof is S$54.4 million) is "AA" rated, the balance is "AAA" rated.
  3. The principal amount of the CB due 2013 is S$650.0 million. The final redemption price upon maturity on 2 July 2013 is equal to 109.31% of the principal amount. The CB may be redeemed in whole or in part, at the option of bondholders on 2 July 2011 at 105.43% of the principal amount.

Operating Activities
Operating net cash flow for the FY ended 31 December 2009 was S$355.6 million, an increase of S$7.7 million over the operating cash flow of S$347.9 million in the preceding FY. This was mainly due to higher NPI offset by higher working capital. NPI grew 10.4% or S$35.7 million from S$341.1 million in FY ended 31 December 2008 to S$376.8 million, largely attributed to the full-year impact of the acquisition of The Atrium@Orchard and CMT Group’s ability to execute its asset enhancement strategies for Tampines Mall, IMM Building, Plaza Singapura, Bugis Junction, Sembawang Shopping Centre and Lot One Shoppers’ Mall.

Investing Activities
Given the tough market environment in 2009, the Group has become more prudent in its capital requirements for new acquisitions and AEI. CMT Group will constantly look out for new acquisition opportunities.

Financing Activities
CMT Group continued to adopt a rigorous and focused approach to monitor the cash position and level of borrowings with the view of strengthening its capital structure and competitive position.

Cash And Cash Equivalents
As at 31 December 2009, the value of cash and cash equivalents of CMT Group stood at S$350.8 million, compared with S$168.4 million as at 31 December 2008. This was mainly due to the balance of the net proceeds from the Rights Issue.

(3) Accounting Policies
The financial statements have been prepared in accordance with the Statement of Recommended Accounting Practice (RAP) 7 "Reporting Framework for Unit Trusts" issued by the Institute of Certified Public Accountants of Singapore, and the applicable requirements of the Code on Collective Investment Schemes (the CIS Code) issued by the Monetary Authority of Singapore (MAS) and the provisions of the Trust Deed.