Risk & Capital Management

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 risk, CMT and its subsidiaries (CMT Group or Group) have integrated risk management into the day-to-day activities across all functions. Measures include the establishment of planning and control systems, group-wide policies, information technology systems, and operational reporting and monitoring procedures which are overseen by the executive management committee and Board of Directors. The risk management system is regularly monitored and examined to ensure continuing 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
The main sources of growth for CMT Group are the acquisition of properties, asset enhancement initiatives (AEI) as well as investment in greenfield developments. The risks involved in such investment activities are managed through a rigorous set of investment criteria which includes potential for growth in yield, rental sustainability and potential for value creation. Also, key financial projection assumptions are reviewed and sensitivity analyses are performed on key variables.

The potential risks associated with proposed projects and the issues that may prevent their smooth implementation or attainment of projected outcomes are identified at evaluation stage. This is to enable us to devise action plans to mitigate such risks as early as possible.

Interest Rate Risk
The Group's exposure to fluctuations in interest rates relates primarily to interest-bearing financial liabilities. Interest rate risk is managed on an ongoing basis, and with the primary objective of minimising the impact on net interest expense that is caused by adverse movements in interest rates. Hence, 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 2011, the risk is minimal as the Group's borrowings are either on fixed rate basis or have been swapped into Singapore Dollar 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 company, Silver Maple Investment Corporation Ltd (Silver Maple) and its wholly-owned subsidiary, CMT MTN Pte. Ltd. (CMT MTN). CMT MTN provides treasury services to CMT, including the on-lending of proceeds from notes issued under the S$2.5 billion unsecured Multicurrency Medium Term Note Programme (MTN Programme), and the US$2.0 billion unsecured Euro-Medium Term Note Programme (EMTN Programme), which was swapped into Singapore Dollars.

RCS Trust, in which CMT has a 40.00% interest, borrows in Singapore Dollars from another special purpose company, Silver Oak Ltd. (Silver Oak). Both Silver Maple and Silver Oak issued foreign denominated notes at floating rates at attractive spreads by borrowing from the overseas markets. They were swapped into fixed rate and Singapore Dollars.

Credit Risk
Credit risk is the potential volatility in earnings caused by tenants' failure to fulfill their contractual lease payment obligations, as and when they fall due. There is a stringent collection policy in place to ensure that credit risk is minimised. In addition to the requirement for upfront payment of security deposit of an amount approximating three months' rent on average (which may be lodged in the form of cash or bankers' guarantee), CMT Group also established vigilant monitoring and debt collection procedures. Debt turnover of CMT Group was 2.7 days and 2.6 days as at 31 December 2011 and 31 December 2010 respectively.

Liquidity Risk
CMT Group actively monitors its cash flow position to ensure that there are sufficient liquid reserves, in the form of cash and credit facilities, to finance its operations and AEI. The Group also monitors banking covenants closely to ensure that they are not breached.

Financing Risk
The health of the debt markets directly affects CMT, given our reliance on external sources of funding for refinancing of existing borrowings, acquisitions of new property and AEI.

Different funding strategies are used to minimise over reliance on a single source of funds for any funding or refinancing requirements. Other than MTN and EMTN programmes, CMT is also one of the first real estate investment trusts to set up a Retail Bond programme and had issued S$300.0 million bonds in 2011 at an interest rate of 2.00% per annum under the S$2.5 billion programme.

CMT has also tapped into the commercial mortgage backed securities (CMBS) and convertible bond markets for funds. In addition, CMT has banking facilities as a source of back-up funds.

CMT will continue to proactively manage its capital structure by ensuring that its debt maturity profile is spread out without any major concentration of debt maturing in a single year, and maintaining an optimal gearing level.

Legal and Compliance Risk
Due to the nature of CMT's business, CMT is required to comply with the relevant legislations and regulations that include the Listing Manual of the SGX-ST (Listing Manual), the Code on Collective Investment Schemes (the CIS Code) issued by the Monetary Authority of Singapore (MAS) and the tax rulings issued by the Inland Revenue Authority of Singapore (IRAS) with regard to the taxation of CMT and its Unitholders. Thus, any changes in these legislations and regulations may affect CMT's operations and results.

CMT's reputation may be adversely affected by its business activities which may bring about unintended or unexpected legal consequences.

The manager of CMT (the Manager) has established relevant policies and procedures to ensure CMT's compliance with applicable legislations and regulations.

Interested Person Transaction Risk
The Manager has established internal control procedures to ensure that all transactions involving the Trustee and a related party of the Manager (Interested Person Transactions) are undertaken on an arm's length basis and on normal commercial terms and will not be prejudicial to the interests of the Unitholders.

For Interested Person Transactions, the Manager would have to demonstrate to the Audit Committee that the transactions were undertaken on normal commercial terms which may include obtaining (where practicable) quotations from parties unrelated to the Manager, or obtaining valuations from independent valuers (in accordance with the Property Funds Appendix). Proactive measures are also adopted to avoid situations of conflict and potential conflict of interest.

Human Resource Risk
In order to deliver quality products and services to our valued tenants and customers, the Manager and Property Manager, CapitaLand Retail Management Pte Ltd, invest in quality human capital by recruiting and retaining employees with the relevant expertise, skills and professionalism. High turnover rate of valued employees can be detrimental as it causes disruptions to CMT's business operations and undermines the implementation of CMT's strategic business plans.

The Manager and Property Manager have also adopted an integrated human capital strategy to recruit, develop and motivate quality employees. In addition to seeking outstanding talents with the required expertise and experience, emphasis has also been placed on managing these talents through staff development and continuous training. Comprehensive compensation and benefits plans are also used to motivate and retain the talents. Such measures are also to ensure that the Group maintains its competitive edge.

Development and Construction Risk
Under the Property Funds Appendix, the total contract value of all property development activities undertaken by CMT Group, together with its investments in uncompleted property developments, may not exceed 10.0% of CMT Group's deposited property. CMT Group's total deposited property as at 31 December 2011 was about S$9.2 billion.

To date, the Manager has committed to invest about S$469.5 million in CMT's first greenfield development project, Westgate. Ground-breaking for this retail-cum-office development had commenced in January 2012. Its retail mall is scheduled to open by end-2013 and its office tower, by end-2014.

The construction and development of new projects usually take a few years to complete, depending on the project size and its complexity. In the event that the projects cannot be completed within the anticipated time frame and budget, the delay may have a material adverse effect on CMT's business, financial position, results of operations and prospects. In addition, significant pre-operating costs incurred may not be recovered within the expected period or at all.

The Manager mitigates such risk through continual monitoring of the progress of these projects and their risks, which are quantitatively measured through the use of the Value-at-Risk model. The Manager has established standard operating procedures (SOPs) to guide project management personnel and ensure that all required applications are submitted for the authorities' approvals. These SOPs are subject to a series of continuity and consistency reviews by management and an independent ISO-auditor. In addition, the Manager has set up a framework for evaluating and pre-qualifying contractors and service providers that would be invited for project-related tenders.

Capital Management

  1. Based on principal sums only.
  2. Under the S$2.5 billion Retail Bond Programme, CMT issued S$300.0 million in principal amount of bonds (Retail Bonds) with an interest rate of 2.00% per annum, fully payable on 25 February 2013.
  3. Based on the outstanding S$256.25 million in principal amount of the S$650.0 million 1.0% convertible bond due 2013 (2013 Convertible Bonds) and S$350.0 million 2.125% convertible bonds due 2014 (2014 Convertible Bonds) issued on 2 July 2008 and 19 April 2011 respectively. The final redemption dates of the 2013 Convertible Bonds and 2014 Convertible Bonds are on 2 July 2013 and 19 April 2014 respectively.
  4. Includes US$500.0 million fixed rate notes issued through the EMTN programme which were swapped to S$699.5 million at a fixed rate of 3.794% per annum in April 2010.
  5. CMT's 40.00% interest in RCS Trust.
  6. Drawdown of S$650.0 million by Infinity Trusts (CMT's 30.00% share thereof is S$195.0 million) from the S$820.0 million secured banking facilities on 30 November 2011.
  7. As at 31 December 2011, unsecured debt accounted for 53.1% of total borrowings.

Under the facility agreement between Silver Maple and CMT, Silver Maple has granted and loaned CMT a total term loan facility of S$783.0 million which is maturing in October 2012.

In February 2011, CMT has established a S$2.5 billion Retail Bond Programme and has issued S$300.0 million Retail Bonds with an interest rate of 2.00% per annum, fully repayable on 25 February 2013.

In April 2011, CMT issued S$350.0 million principal amount of 2014 Convertible Bonds at an interest rate of 2.125% per annum which is convertible by bondholders into Units at an initial conversion price of S$2.2692 (which is adjusted to S$2.2427 on 30 January 2012). The final redemption date is 19 April 2014.

In addition to the S$100.0 million repurchased in October 2010, CMT further repurchased S$106.0 million and S$100.0 million in principal amount of the 2013 Convertible Bonds in April and July 2011 respectively. In July 2011, S$87.75 million in principal amount of the 2013 Convertible Bonds was redeemed pursuant to the put option exercised by the bondholders. Following the repurchase and redemption, the outstanding aggregate principal amount of 2013 Convertible Bonds is currently S$256.25 million. The final redemption price upon maturity on 2 July 2013 is equal to 109.31% of the principal amount.

The above mentioned repurchase of the S$206.0 million and redemption of S$87.75 million of the 2013 Convertible Bonds (including respective repurchase and redemption prices and accrued interest) were refinanced by the net proceeds from the S$350.0 million 2014 Convertible Bonds. The balance of the net proceeds were used for other general corporate and working capital purposes. This is in accordance with the stated use and allocation of the proceeds from the 2014 Convertible Bonds.

CMT has a 40.00% interest in RCS Trust. On 21 June 2011, Silver Oak has granted RCS Trust a term loan facility of S$1.0 billion and a revolving credit facility of S$300.0 million under the loan agreements between Silver Oak and RCS Trust Trustee-Manager. RCS Trust drew down the S$1.0 billion to refinance the existing loans of S$964.0 million (comprising term loan of S$866.0 million and revolving credit facility of S$98.0 million), ahead of the expected maturity date on 13 September 2011. CMT Group's 40.00% share of RCS Trust's term loan is S$400.0 million.

In November 2011, Infinity Trusts drew down S$650.0 million term loan from the total facilities of S$820.0 million (comprising term loan of S$650.0 million and revolving credit facility of S$170.0 million). CMT Group's 30.00% share of Infinity Trusts' term loan is S$195.0 million.

In summary, the total borrowings of CMT Group as at 31 December 2011 was S$3,483.8 million, with gearing at 38.4%.

CMT holds derivative financial instruments to hedge its currency and interest rate risk exposures. The fair value derivative for FY 2011, which was included as financial derivatives in total liabilities was S$69.4 million. This represented 1.3% of the net assets of CMT Group as at 31 December 2011.

The loan maturity profile for CMT Group as at 31 December 2011 was as follows:

  1. Based on principal sums only.

As at 31 December 2011, 22.5% or S$783.0 million of CMT Group's debt will mature in 2012. CMT has sufficient internal resources and existing bank facilities to cover the repayments due in 2012. The Manager will continue to adopt a rigorous and focused approach to capital management.

Average cost of debt for CMT Group for FY 2011 has decreased to 3.5% per annum compared with 3.7% per annum for the FY 2010 as the new loans taken up in 2011 are at comparatively lower interest rates than the loans that were repaid.

  1. CMBS of S$783.0 million are rated 'AAA' by Fitch Inc. and 'Aaa' rated by Moody's.
  2. Secured S$256.25 million 1.0% 2013 Convertible Bonds with conversion price of S$3.39 redeemable on 2 July 2013 at 109.31% of the principal amount.
  3. 2014 Convertible Bonds at fixed rate of 2.125% p.a. with initial conversion price of S$2.2692 (adjusted to S$2.2427 on 30 January 2012).
  4. US$500.0 million 4.321% p.a. fixed rate notes were swapped to S$699.5 million at a fixed interest rate of 3.794% p.a. in April 2010.
  5. Drawdown of S$650.0 million by Infinity Trusts (CMT's 30.00% share thereof is S$195.0 million) from the S$820.0 million secured banking facilities on 30 November 2011.
  6. S$200.0 million 5-year term loan from Silver Oak (CMT's 40.00% share thereof is S$80.0 million).
  7. On 21 June 2011, Silver Oak issued US$645.0 million in principal amount of Class A Secured Floating Rate Notes with expected maturity on 21 June 2016 (Series 002 Notes). The Series 002 Notes are issued pursuant to the S$10.0 billion Multicurrency Secured Medium Term Note Programme established by Silver Oak and are secured by its rights to Raffles City Singapore. The proceeds have been swapped into S$800.0 million (CMT's share thereof is S$320.0 million).

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.

Operating Activities
Operating net cash flow for the FY 2011 was S$381.5 million, a decrease of S$1.7 million over the operating cash flow of S$383.2 million in the preceding financial year. This was mainly due to the payment of Goods and Services Tax in relation to the tender price and other costs incurred for the Westgate project under Infinity Trusts which will be recovered from IRAS.

Investing Activities
CMT Group continued its acquisition strategy and increased the number of investment properties in the portfolio from 15 to 16 with the acquisition of Iluma as well as investing in Westgate under Infinity Trusts. This further strengthens CMT's lead as Singapore largest real estate investment trust by asset size.

After going through the tough market environment, 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 2011, the value of cash and cash equivalents of CMT Group stood at S$757.6 million compared with S$712.9 million as at 31 December 2010. The higher quantum was mainly due to the net proceeds from the private placement of S$250.0 million on 10 November 2011. As at 1 March 2012, S$12.0 million from the net proceeds from the private placement has been used for certain committed capital expenditure and AEI. This is in accordance with the stated use and allocation of the proceeds from the private placement.

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 CIS Code issued by the MAS and the provisions of the Trust Deed.

CapitaMall Trust Report to UnitHolders 2011