Moody's downgrades Frasers Hospitality Trust's outlook to negative

CREDIT ratings agency Moody's Investors Service has changed its outlook on Frasers Hospitality Trust (FHT) to negative from stable, while affirming its Baa2 issuer ratings.

Moody's has also affirmed the provisional (P)Baa2 backed senior unsecured rating on the S$1 billion multicurrency medium-term securities programme issued by FHT's wholly-owned subsidiary FH-REIT Treasury, and the Baa2 ratings on the backed senior unsecured notes issued under the programme.

The change in outlook reflects FHT's weakened operating performance and Moody's expectation that FHT's credit metrics will remain weak relative to its Baa2 rating, at least over the next 12 to 18 months, said analyst Sweta Patodia.

Moody's expects FHT's net debt/Ebitda to remain around 8.4 times over the next 12 to 18 months, which is right at the downgrade trigger of net debt/Ebitda exceeding 8 to 8.5 times.

The operating environment in Australia is expected to remain weak, with occupancy and room rates likely to remain subdued. This will continue to impact the operating performance of FHT's Australia properties.

While this is partially mitigated by management changes implemented at some Australia properties, the net debt/Ebitda improvement is expected to be marginal. This implies that credit metrics will remain under pressure, and FHT will have limited financial flexibility for further increases in borrowings or deterioration in operating performance from current levels, said Moody's.

The affirmation of FHT's Baa2 issuer rating reflects the strong quality of its portfolio assets, which are well diversified across geographies and hospitality asset classes. The rating also considers FHT's strong liquidity, with no debt maturities until 2022.

"However, the rating remains constrained by FHT's small asset size and significant tenant concentration risk," said Moody's.

Given the negative outlook, a ratings upgrade is unlikely, it added.

FHT's rating could be downgraded if the operating environment fails to improve from current levels and credit metrics do not recover, or FHT engages in any debt-funded acquisitions that weaken its credit metrics from current levels.