The rest of the acquisition cost, which totals S$850 million, will be covered by internal resources. Over the past couple of months CapitaMall has issued S$395 million of bonds due 2009 and 2010 under its medium-term note programme and it seems likely that some of those funds will directed to this project. The seller is a Singapore government entity.
The CB is fairly straight forward with a five-year maturity and three-year put, and a 1% coupon that was fixed at launch. It also has an issuer call after three years, subject to a 130% trigger. Crucially though, the bonds will be secured against the newly acquired property. Secured CBs are rare in Asia, but the structure would have made investors more confident about recouping their money in case of a default and likely contributed to the fact that the deal priced inside the best terms for investors û both with regard to the yield and the conversion premium.
It also meant that investors were not particularly concerned about hedging the credit and, according to a source, there were barely any takers for the credit default swaps offered by Goldman Sachs, the sole bookrunner and underwriter of the CB, for about one-third of the deal. Some investors also considered the offered spread of 250bp over Sibor too high as they were using a tighter 200bp in their valuation models.
And on top of that, there is plenty of cheap borrow available in this name, which means it is easy for investors to hedge the equity option, should they wish to do so.
The yield was fixed at 2.75% after being offered in a range between 2% and 3%, while the conversion premium was set at 24% over the volume-weighted average price in yesterdayÆs morning session that came out at S$3.5146. (CapitaMall was suspended from trading in the afternoon to carry out the CB transaction.) The premium was offered at 20% to 35%.
These terms were noticeably more favourable to the issuer than those achieved by two other Singapore Reits this year: Suntec ReitÆs $179 million CB in late February; and the $203 million offering for CapitaCommercial Trust (which has the same sponsor as CapitaMall, i.e. CapitaLand) in early April. The Suntec bonds featured a coupon of 3.25%, a yield of 4.25% and a 23% premium, while CCT was priced with a 2% coupon, a 3.9% yield and a 23.9% premium. Both deals were priced at best terms for investors.
The tightening of global credit spreads in recent weeks obviously played a role in allowing CapitaMall to achieve a lower yield and coupon, as would the fact that it is the highest rated Reit in Singapore with A-/A2 ratings from Standard & PoorÆs and MoodyÆs, respectively. But again, the biggest difference is probably the decision to secure the bonds on the Atrium@Orchard property.
In a statement announcing the acquisition, CapitaMall said the CBs will provide it with an ôattractive source of fundingö by closely matching the coupon rate with the expected rental revenue growth profile at Atrium in the next few years. The initial property yield of approximately 2.1% is higher than the coupon rate of 1.0%, it added.
Based on a 200bp credit spread, a 1% stock borrow cost and protection against dividends that exceed a yield of 5.9%, the bond floor comes out at 95.7%. The implied volatility is close to 23%, which compares with a 100-day historic volatility of 44%.
The bonds met with a good response from investors, despite the still tepid interest in Singapore Reits in the secondary market. There was no information last night about the coverage ratio, but the pricing indicates that the demand was solid û and also less price sensitive than on most other deals in past months. About 60 investors were said to have bought into the deal which was launched at about 2pm Hong Kong time and stayed open for six hours. In terms of geographical split, approximately 70% of the demand came from Asia and the rest from Europe. The deal wasnÆt open to onshore US investors.
The decision to go ahead and complete the CB transaction on the same day as the acquisition of the Atrium@Orchard property was announced may have been prompted by a report published by MoodyÆs yesterday morning that highlighted the difficulty faced by Singapore Reits when it comes to funding.
ôDespite overall sound fundamentals, negative sentiment and tighter liquidity have impaired the access of some issuers to the capital markets,ö the ratings agency said. ôTighter conditions for borrowing has adversely affected both the availability and price of credit at a time when a number of S-Reits face imminent refinancing needs. In addition, the depressed unit prices of many trusts have reduced the attractiveness of equity funding and boosted leverage at some entities as they have been forced to fund already committed acquisitions with debt, often short term in nature.ö
MoodyÆs also slapped a negative outlook on SingaporeÆs Reit sector (often referred to as S-Reits) for the next 12-18 months, a move which could put additional pressure on unit prices for a sector that has been largely shunned by investors for more than eight months.
ôCapitaMall would have wanted people to have no doubts about its ability to raise financing for this deal,ö notes the source.
CapitaMall has been one of the better performers relative to the rest of the sector though and while yesterdayÆs closing price put the trust 20% below where it was 12 months ago, the unit price has rebounded 32% from the January lows.
If fully converted, the CB could result in a dilution of about 9% for the existing unitholders, and consequently may trigger some near-term weakness in the unit price. However, the acquisition of Atrium@Orchard from the Singapore government should be positive in the sense that it will strengthen CapitaMallÆs retail presence in downtown Singapore and it will also boost its asset size to S$6.9 billion from S$6.0 billion.
In the statement, CapitaMall said it will continue to ôactively pursueö yield accretive acquisition opportunities and have revised its local target asset size from S$8.0 billion to S$9.0 billion by 2010.
¬ Haymarket Media Limited. All rights reserved.
