DBS Bank is preparing to launch a ground breaking HK$1.1 billion ($141 million) fundraising for Fortune Reit to sub-underwriters. The borrower is sponsored by Cheung Kong and comprises five shopping malls all located in Hong Kong including Household Centre, Jubilee Court, Ma On Shan Plaza, Metropolis Mall and Smartland.
The deal is split between a HK$900 million ($115 million) five-year term loan and a HK$200 million ($25 million) five year revolving credit. Banks will receive a margin that steps up from 60bp over the first three years to 65bp for the final two years.
The financing marks a big step forward for DBS, which has also just launched the listing process for the REIT on the Singapore Stock Exchange. The bank continues to enhance its share of the Hong Kong dollar loan market and Dealogic figures show that while it arranged just three such transactions in 2001, it increased the figure to 10 last year and has won mandates for eight so far in 2003.
While the bank has not participated in the upper echelons of the blue chip deals, it has been syndicating a large number of deals for the second tier firms. These credits are relatively small, but the response from the Hong Kong banks has been excellent and many of the deals have achieved oversubscriptions.
This is the first deal of its kind to be launched into the Hong Kong dollar market and the arrangers are confident the transaction will be a success. Market observers suggest that this facility could establish a new trend in fundraising opportunities in Hong Kong as banks attempt to take advantage of the higher pricing on offer.
One senior loan syndicator agreed with this, saying this was perhaps the opportunity that banks have been waiting for. Many have long been complaining about the wafer thin fees paid out on the plain vanilla Hong Kong dollar deals and the success of this syndication will determine the appetite for this type of credit and perhaps the dawn of a larger fee earning era.
The margin available on this financing is significantly more attractive than the previous deal for Cheung Kong, a HK$2.4 billion ($308 million) financing that paid an all-in of just 43bp for five years on a margin of 35bp. Bankers have had a lot of these with a whole host of similar deals coming to the market, such as Swire paying a margin of just 32bp, Hang Lung 35bp and Hutchison 41bp.
Market sources suggest that more REIT related transactions would be sure to follow as they will benefit other market participants aside from the banks. Both investors, who will be able to earn more than the low interest rates currently on offer, and clients with large portfolios which are severely discounted to their net asset value can benefit.
The Hong Kong SFC is ironing out the final rulings on REITs listing on the Hong Kong stock exchange and expects to have the first application approved in about a month.
If investors take to the trusts with the enthusiasm predicted then there could be many more opportunities for banks to raise funds for the new entities. While the market approves of the introduction of REITs into Hong Kong, some observers have cast words of warning regarding the quality of the assets that will be repackaged.
This may cause some investors to disregard these vehicles, and therefore reduce the number that are formed. This has not dampened the eagerness of bankers to participate in this transaction and early reports have been encouraging with many expressing great interest in signing up to the deal.
The arranger is currently conducting discussions with a select handful of relationship banks of the sponsor. The final syndication strategy has yet to be formed but the arranger will launch the deal to sub-underwriters this week.
Once this phase has been completed they will decide whether to pursue general syndication. Officials close to the deal point out that general syndication on this facility will be unlikely as the size is relatively small and it is improbable that any of the banks joining at this level will wish to sell down their takes.