Asia Square Tower 2 (Photo: REITsWeek)Asia Square Tower 2, a property under CapitaLand Commercial Trust (Photo: REITsWeek)

Moody's Investors Service has downgraded CapitaLand Mall Trust (CMT) to A3 with a negative outlook.

At the same time, Moody’s has also upgraded its office-focused sister REIT, CapitaLand Commercial Trust (ccT) to Baa1 with a stable outlook.

Moody's has also downgraded senior unsecured ratings, and medium-term note program ratings of the notes issued a subsidiary of the REIT.

The outlook on all of CMT's ratings has been changed to negative from rating under review.

The ratings actions follow extraordinary general meetings (EGMs) of CMT and CCT, which pertain to a proposed merger between the two REITs.

Related: Unitholders approve formation of CapitaLand Integrated Commercial Trust

"The downgrade reflects our expectation that CMT's credit metrics will weaken and remain at levels no longer consistent with its A2 rating, driven by the merger with CCT, which has a weaker leverage profile, coupled with the incurrence of around SGD1 billion in incremental debt to fund the merger's cash consideration," says Junling Tan, a Moody's analyst.

This is consistent with the opinion of S&P, which issued a similar opinion on CMT’s credit metrics just days ago.

Related: CapitaLand Mall Trust’s NPI for 2020 to dampen by up to 20% due to COVID-19

"The curtailment of international travel, social distancing measures and weaker consumer sentiment due to coronavirus disruption, will also curb retail spending at retail malls and could sustainably increase vacancy and lower rental income”, Tan added.

Meanwhile, CCT was upgraded on expectations that the REIT would reduce its leverage following the merger such that it will be able to maintain its current credit profile despite transfer of assets to the enlarged CMT.

The upgrade also incorporates a one-notch uplift in CCT's rating because of our expectation of strong linkages and integration between the enlarged CMT and CCT after the merger”, said Tan, who is also Moody's Lead Analyst for CCT.

By Shariffa Al-Habshee

Shariffa joined REITsWeek in 2017, and monitors Asia-Pacific REITs for the publication.