MAS consults on proposed amendments to leverage requirements for REITs
1 August 2024
On 24 July 2024, the Monetary Authority of Singapore (“MAS”) published a consultation paper proposing to subject all real estate investment trusts (“REITs”) to a minimum interest coverage ratio (“ICR”) threshold of 1.5 times and an aggregate leverage limit of 50%, as it simplifies leverage requirements for the sector. MAS also proposes that REITs perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on REITs’ ICRs. The consultation closes on 23 August 2024.
Minimum ICR threshold of 1.5 times and aggregate leverage limit of 50% for all REITs
MAS proposes that a minimum ICR threshold of 1.5 times apply at all times to all REITs. This underscores the responsibility of REIT managers in ensuring that REITs can adequately service debt obligations, including having sufficient earnings to pay their interest expenses as they fall due. The proposed threshold is set at 1.5 times as it will now be applied to all REITs. Currently, the ICR requirement of 2.5 times is to be met only by REITs which intend to increase their aggregate leverage from 45% to 50%.
The proposed minimum ICR requirement will not be considered breached if a REIT’s ICR falls below the threshold of 1.5 times due to circumstances beyond the control of the manager. However, regardless of the circumstances under which the REIT’s ICR has fallen below the threshold of 1.5 times, the REIT should not incur additional borrowings or enter into further deferred payment arrangements. For the avoidance of doubt, the REIT can continue to refinance its existing borrowings.
The ICR and aggregate leverage work complementarily to indicate a REIT’s financial strength. To simplify the requirements, MAS proposes to adopt a single aggregate leverage limit of 50% for all REITs.
MAS states that a leverage limit of 50%, together with the ICR floor, will continue to foster prudent borrowing by REITs.
Requirement to perform and disclose sensitivity analysis on impact of changes in EBITDA and interest rates on REITs’ ICRs
To provide investors with information on how a REIT’s credit profile could be affected by changes in market conditions, MAS proposes to require REITs to perform and disclose sensitivity analysis on the impact of changes in EBITDA and interest rates on REITs’ ICRs in their interim financial results and annual reports. Such sensitivity analysis should be reasonable in the opinion of the REIT manager based on each REIT’s business profile.
For consistency and comparability across the industry, the interest rate sensitivity analysis should include at least one scenario assuming a 10% decrease in EBITDA and a 100 basis points increase in interest rates.
Reference materials
The following materials are available on the MAS website www.mas.gov.sg: