Cromwell: Rising Bond Yields Add to Balance Sheet Stress; Uncertainty Is Extreme
We reduce our fair value estimate for Cromwell CMW by 18% to AUD 0.70, down from 0.85, and our Uncertainty Rating worsens to Extreme from High. A rise in bond yields, and a slump in Cromwell’s stock price to AUD 0.35 per security, make it unlikely it can raise equity at our previously assumed AUD 0.50 per security. We now assume Cromwell raises AUD 510 million at AUD 0.30 per security.
Cromwell could try to wait out market concerns, given 70% of its debt is hedged to around early 2025, and it is endeavoring to sell assets and pay down debt. However, in our view, a meaningful capital raising is likely needed given asset quality is lower than average among our REIT coverage, financial leverage among the highest of our coverage, property prices under pressure, and direct property transactions are still rare. Some repayment of euro-denominated debt repayment might increase its level of interest rate hedging, a possibility if Cromwell sells its Polish retail assets, where a buyer’s offer is on the table subject to due diligence. Even so, compared with other REITs, Cromwell’s hedge duration is short and gearing is high at 47%, including debt in underlying funds. Last week’s resignation of Cromwell’s long-serving CFO, Michael Wilde, could add to market concerns. Rising interest rates are unhelpful, and even if the Polish assets are sold, we think further debt repayment would still be required.
Cromwell might hope that market conditions ease before it is exposed to market interest rates. However, if rates remain at current levels or higher, and/or Cromwell can’t sell assets at satisfactory prices, there’s potential for significant further dilution and downside to our fair value estimate. Once Cromwell repairs its balance sheet, the market can have some confidence in a valuation. The lower-quality asset portfolio relative to peers, financial leverage among the highest of our REIT coverage, and intensifying financial conditions, dictates an Extreme Uncertainty Rating.
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