CapitaLand group joins the wave of rights issuers

The stream of Asian companies seeking new equity capital through right issues is continuing at a steady pace with Singapore property developer CapitaLand and its 29.7% associate CapitaMall Trust yesterday announcing their intention to raise a combined S$3.07 billion ($2.05 billion).

CapitaLand is offering S$1.84 billion worth of shares on the basis of one new share for every two existing ones. The price has been set at S$1.30 per share, which represents a 45% discount to Friday's closing price of S$2.36 and a 35% discount to the theoretical ex-rights price of S$2.01. It also implies a 54% discount to the post-rights issue net tangible asset value of S$2.80. Temasek, which is the largest shareholder in CapitaLand with a 39.7% stake, has committed to buy its pro-rata shares. The rest of the deal is underwritten by the three bookrunners, namely DBS, J.P. Morgan and Merrill Lynch, giving CapitaLand the certainty of execution even if its minority shareholders should decide not to participate.

Meanwhile, CapitaMall Trust (CMT), which is the largest real estate investment trust in Singapore with a focus on commercial property, is offering S$1.23 billion worth of units on the basis of nine new units for every 10 units held at present. The price is S$0.82 per unit, which equals a 43.4% discount to Friday's closing price of S$1.45, a discount of approximately 28.7% to the theoretical ex-rights price of S$1.15 per unit, and a discount of 50.3% versus the pro forma net asset value of S$1.65. Both companies were suspended from trading yesterday as the two deals were announced.

Showing its support for the CMT offer, CapitaLand will take up its 29.7% entitlement and will also underwrite a further portion up to a combined 60% of the issue. The remaining 40% is underwritten by joint bookrunners DBS and J.P. Morgan. Since Singapore Reits can only issue up to 10% of their existing share capital without a specific approval from unitholders, this deal will require a vote at an extraordinary general meeting on March 3. Investors holding existing units on March 6 will be eligible to participate in the offering and the deal will stay open until March 25.

No such approval is necessary for the CapitaLand offering, enabling this deal to close on March 12. The cut-off date for determining which shareholders are eligible to participate will be February 23.

The two deals come a couple of weeks after DBS group completed a $4.1 billion ($2.7 billion) rights issue that attracted strong interest and ended 118.8% subscribed. And in December, Standard Chartered, which has a strong presence in Asia and is listed in both Singapore and Hong Kong, raised $2.7 billion from a rights issue which was offered at an initial 49% discount and ended up 97% subscribed. Meanwhile, Korea's Shinhan Financial Group launched a rights issue last week that will raise up to W1.6 trillion ($1.15 billion) at a price that has yet to be determined.

While property companies as a group may find it slightly harder than banks to raise capital in the current environment, both CapitaLand and CapitaMall are high-quality companies and the backing by Temasek, which is also the largest shareholder in both DBS and Standard Chartered, should encourage investors. One banker referred to them as "winners" and noted that "the market likes winners."  Perhaps. Although looking at their share prices you might never have guessed that, with CapitaLand off 72% from its highs in October 2007 and CapitaMall down 63% in the same period. CapitaLand has lost 24% of its market value since the beginning of this year, which according to Bloomberg makes it the worst performer among the 30 stocks in the Straits Times Index. However, for investors who believe the companies will rebound at least part of the way towards their former glory, the depressed share/unit prices may actually help boost interest for the new issues as the discounts will look even more attractive.

He also noted that it makes sense to launch both deals at the same time since there have been a lot of speculation that the Singapore Reits in general will need to come to the equity market in the near-term and if CapitaMall had decided to hold off for a while - until after its earnings announcement for example - it would likely have created an overhang on the stock once CapitaLand had shown its intentions. 

Like DBS, CapitaLand stressed that it is raising capital from a position of financial strength and said its businesses have continued to deliver a strong business performance despite the challenging real estate markets globally. However, company representatives also noted that homebuyer sentiment in its core markets in Singapore, China and Australia is expected to remain cautious given the global economic slowdown, suggesting that it may also be preparing for tougher times ahead.

"The rights issue is pre-emptive to strategically enhance the group's financial flexibility," said Liew Mun Leong, the group's president and CEO. "A stronger balance sheet will allow us to enhance our strength in our core businesses of residential, retail malls, commercial, serviced residences, integrated developments and real estate financial services. We will also be well-positioned for any mergers and acquisitions opportunities that might arise."

Even before the rights issue, CapitaLand had S$4.2 billion of cash on its balance sheet and as a result of the deal its net debt-to-equity ratio is expected to improve to 0.28 from 0.47 at the end of 2008.

The developer posted a net profit of S$1.26 billion in 2008, which was down 54% from S$2.76 billion in 2007, but slightly above the S$1.01 billion it achieved in 2006. In a statement accompanying the earnings release (which was also published yesterday) CapitaLand's chairman, Richard Hu, noted that the company had been able to successfully realise asset values from its portfolio through "timely divestments" while at the same time growing its base of recurring fee and rental income.

According to Liew, S$3.3 billion worth of assets were monetised in 2008 "in line with the group's consistently disciplined strategy of recycling capital," resulting in a gain of S$607 million.

The divestments include the outright sale of Capital Tower Beijing and Hitachi Tower in China, the sale of Singapore's One George Street to its associate CapitaCommercial Trust and the sale of the Raffles City portfolio to its 50%-owned Raffles City China Fund. Even so, the assets under management at CapitaLand's five Reits and 17 private equity real estate funds grew by S$8.2 billion during the year to S$25.9 billion.

In light of the healthy earnings, CapitaLand proposed to pay a dividend of 5.5 Singapore cents per share for 2008, which based on the enlarged share capital after the rights issue will result in a total payout of S$233 million, or 4.4% more than what it paid in 2007. On top of that, it will also pay a special dividend of 1.5 Singapore cents per share. Investors who decide to participate in the rights issue will be entitled to these dividends.

CapitaMall said it plans to use about S$956 million of the proceeds from the rights issue to repay borrowings, allow it to reduce its aggregate leverage to 29.1% from 43.2% at the end of December. The Reit manager said it believes that the reduction in leverage will help to optimise CMT's capital structure and provide greater financial flexibility to capitalise on opportunities, including asset enhancements. The improved credit profile will also enhance CMT's ability to secure debt facilities at potentially more competitive terms, it said.