CCT’s successful refinancing of S$580m of CMBS debt (28% of total debt; 88% of debt expiring in 2009) in early January has removed any refinancing risk for the company at least for this year. We anticipate a refinancing rate of 5.0-5.5% for its new three-year term loan, assuming a 250-300bp credit spread. This brings its weighted average cost of debt to 4%, up from the current 3.6%. Further, the term loan has been secured by only one building (Capital Tower) vs seven buildings for the CMBS, which is another positive for the stock.

CCT is unlikely to require recapitalisation despite a likely drop in office rents. Historically, revaluations had been significantly milder than spot rent changes, which we believe could be due to its staggered lease expiry of about three years. We further estimate 19% of CCT's portfolio by NLA has fixed long-term rents that are 50-60% below market rates (eg, HSBC Building, Capital Towers). This should buffer the impact of spot rent declines on CCT's property valuations. Assuming a 30% drop in office spot rents in 2009, CCT's portfolio would see only a 15% decline in property valuations. We estimate CCT can afford a 17% drop in valuation before its 45% gearing target is reached and a 38% drop before the 60% regulatory limit is reached.

Despite having one of the strongest sponsors among office REITs and owning quality assets, CCT's yields at 11% in both FY09F and FY10F are similar to Bloomberg estimates for KREIT and Suntec REIT of 11-12%. These high yields include our estimated 30% yoy decline in office spot rents in both FY09 and FY10 as well as higher interest costs. We upgrade CCT to Buy from Hold with a DCF-based target price of S$1.60. The stock trades at a steep 65% discount to its September 2008 RNAV of S$2.94.