The deal was somewhat unique among the Asian CBs issued so far this year in that it was sold without any credit bid and also without any access to stock borrow, meaning it wasnÆt a volatility trade. This also makes it difficult for investors to hedge the trade.
Consequently, most of the investors who participated in the deal would have done because they expect the Reit to continue to generate solid growth. The fact that it was able to pull this off was testament to the quality of the underlying assets and the management, but the company did have to make some concessions on the price, with both the yield and the conversion premium pricing at the best-end for investors.
However, part of that may have been due to a tough day in European equity markets while the CB was being marketed with the FTSE100 index off 1.8% and GermanyÆs DAX index slumping 1.9%. Indeed, there was reportedly very little demand for the Suntec offering from European accounts. The latter are also faced with a prolonged period of weakness in their own European Reits, which has led to poor sentiment for the sector overall and has made them less inclined to take a bet on lesser known names in Asia, one source notes.
Asian investors on the other hand know the name well. Listed in December 2004, the Reit started out as the owner of the majority of properties in SingaporeÆs largest integrated commercial development office and retail complex Suntec City. It has since expanded to include a few more assets such as the Park Mall and Chijmes, a historical building housing restaurants and retail shops.
At the time of the listing, Suntec was sponsored by a consortium of 12 Hong
Kong developers, including Cheung Kong HoldingsÆ Chairman Li Ka-shing, New World Development Chairman Cheng Yu-tung and Henderson Land Chairman Lee Shau Kee. Lee sold his entire 5.3% stake in the Reit for $100 million at the end of June last year, cashing in just before the downturn.
The Suntec Reit CB was offered with a conversion premium between 23% and 28% over yesterdayÆs close of S$1.60 and priced at 23%. This gives a conversion price of S$1.968, which is slightly below the closing high of S$2.09 from June last year. The yield was fixed at 4.25% after being offered in a range between 3.75% and 4.25%.
However, the company got away with a coupon of only 3.25%, which represents quite a low cost of funding in the current market environment. The wide-end terms may also allow it to exercise the S$50 million overallotment option. According to a source, the offering was covered including the shoe and attracted about 40 investors.
The bonds, which were jointly arranged by Citi and Deutsche Bank, have a five-year maturity, but can be put back to the issuer on the third anniversary. There is also an issuer call after three years, subject to a 130% hurdle.
They were indicated with a credit spread of 300bp, which the source suggested was quite generous for a credit that is rated BAA1 by MoodyÆs. However, investors remain cautious as the continued volatility in both credit and equity markets make it difficult to project where valuations will be a week from now and the sell-off in Europe wouldnÆt have helped.
In addition, MoodyÆs last Friday revised its outlook on SuntecÆs ratings to negative, citing concerns over the trustÆs near-term refinancing risks in light of the challenging credit market conditions.
"Suntec Reit has 40% of its total debt, mostly related to the bridge financing for its One Raffles Quay acquisition, falling due in the coming eight months," Moody's lead analyst for the company, Kathleen Lee, said in a statement. "A third of its short-term debt is due to mature at end-April 2008, but committed long-term financing to term out the debt has yet to be finalised. At the same time, Moody's draws some comfort from the ReitÆs high asset quality and the fact that its operating performance is in line with expectations,ö Lee said.
The fact that Suntec was able to come to the market and complete a deal so quickly after MoodyÆs revised outlook shows there is a fundamental level of support for the credit as well as a great deal of belief in the growth story even though the entire Singapore Reit sector has been under pressure since the subprime crisis took hold in August last year. Suntec is no exception, in this regard and by late January the unit price was down as much as 33% from the highs six months earlier. However, after hitting a low of S$1.41 the unit price has assumed a rising trend in recent weeks.
It is worth noting though that Suntec has another S$350 million to refinance in October, which means there is more risk to come.
Other underlying assumptions include a conversion price adjustment for dividend payouts that exceed a 6.3% yield and a 5% stock borrow cost. Based on this û and a 300bp credit spread - the bond floor comes out a 97% and the implied volatility at about 23%. The latter compares with a 100-day volatility of 29%.
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