A-Reit raises S$300 million from collateralised exchangeable

Ascendas Real Estate Investment Trust (A-Reit) last night raised S$300 million ($215 million) from an innovatively structured exchangeable bond -- referred to as exchangeable collateralised securities -- that it will use to buy back an outstanding issue of commercial mortgage-backed securities (CMBS).

The outstanding €165 million (roughly equal to S$300 million) CMBS doesn't mature for another two years, but by buying it back early -- at a price slightly below par -- A-Reit will extend the average life of its debt to 4.5 years from 2.4 years now and reduce its cash interest payments.

To get the best possible pricing, the exchangeable is secured by 19 properties with a combined value of S$937 million as at the end of March 2009 (roughly 20% of A-Reit's total assets) and features covenants that ensure that the cash flow from these properties will be sufficient to cover the interest payments on the bonds. If the coverage ratio falls below two times, the company will need to add to the collateral. The combination of these two features allowed A-Reit to secure a provisional triple-A rating for the exchangeable from both Moody's and Standard & Poor's. On a standalone basis, A-Reit has a Baa2 credit rating for unsecured debt from Moody's -- eight notches below a triple-A rating and just two notches above non-investment grade territory. A-Reit is no rated by S&P.

In a note announcing the rating, Moody's said that the structure "allows for timely payment of interest and ultimate payment of principal at par on or before the final maturity date". The rating agency also noted that A-Reit has a diversified portfolio in good locations and said most of the properties are in fairly good condition, with easy access to public transportation and major expressways. It also has a mix of long-term and short-term leases, which, Moody's said, provides the transaction with "stability of income". The trust focuses on investments in real estate for industrial and business use, including entire IT and industrial parks.

Investors welcomed the extra security and the deal was well covered by a mixture of hedge fund and outright investors. According to a company statement issued Tuesday, the bonds were 4.5 times subscribed and attracted more than 70 institutional investors. The strong interest was also evident by the fact that the price was fixed at the best end for the issuer, resulting in a coupon/yield of 1.6% (the bonds are issued and redeemed at par) and an exchange premium of 25% over yesterday's close of S$1.96. The bonds were marketed with a coupon between 1.6% and 2.1% and a premium ranging from 20% to 25%. The final premium will result in an initial exchange price of S$2.45. Citi acted as the sole bookrunner for the deal.

The Singapore dollar-denominated bonds were issued by a special purpose vehicle, Ruby Assets, but exchangeable into A-Reit units that are listed on the Singapore Exchange. The bonds have an expected seven-year maturity with a five-year put at par. However, the deal has been structured like a CMBS with a legal maturity of nine years, with the last two years to be used for the liquidation of the underlying properties in case the bonds aren't repaid by the expected maturity date. There is also a call after five years, subject to a 130% hurdle.

The bonds were marketed at a credit spread of 125bp over Sibor, resulting in an implied volatility in the mid-20s. There is stock borrow available in the market at prices ranging from 1% all the way up to 3% and the exchange price will be adjusted for dividend yields above 3%. A-Reit's current payout ratio and unit price imply a dividend yield of about 6.5%. The bond floor ended up at around 91.5%.

As of the end of December, A-Reit's portfolio of 91 properties in Singapore was valued at about S$4.8 billion. It comprises business and science park properties, hi-tech industrial properties, light industrial properties, and logistics and distribution centres. The properties house about 900 international and local companies from a wide range of industries and activities, including research and development, life sciences, information technology, light manufacturing, telecom and back-room office support in service industries. Major tenants include Singapore Telecommunications, Siemens, Johnson & Johnson, Procter & Gamble and Hyflux.