Champion secures financing for Langham acquisition

The $600 million CB and the $380 million equity placement are both priced at best terms for investors.
Champion Real Estate Investment Trust has succeeded in raising the HK$12.9 billion ($1.6 billion) it needs to pay for the earlier announced acquisition of Langham Place, a retail and office complex in Hong KongÆs Mong Kok district, that will increase its asset value by more than 50% and position it as one of largest Reits in the region in terms of market value.

The two most crucial parts of the financing package û a $380 million equity placement and a $600 million convertible bond û were completed yesterday morning Hong Kong time after a bookbuilding exercise that lasted through the night. The trust is also issuing $361 million worth of new units to Hong Kong real estate developer Great Eagle Holdings, which is the sponsor and controlling unitholder of Champion Reit, while about $315 million will come from a bank loan. All four legs of the financing package will close on June 3.

Citi is the sole arranger for the entire package and also acted as the financial adviser to Champion manager Eagle Asset Management on the Langham Place acquisition.

The equity placement and the five-year CB were both priced at the most favourable terms for investors, which for the CB meant a conversion premium of 25% and a yield of 5.25%. This came as no great surprise given the still jittery market environment and the large size of the transaction. The combined $980 million raised from these two legs, compare with a pre-deal market cap of $1.4 billion and the equity portion alone accounted for 29.3% of the existing share capital and more than 250 days worth of trading volume.

And together with an exchangeable into Malaysian palm oil producer IOI Corporation in January, which also raised $600 million, this is the second largest equity-linked deal in Asia this year behind CapitaLandÆs $920 million CB in early February. It is also the largest CB issued by an Asian Reit ever.

Sources say both legs were sufficiently covered, but were unable to specify the total order amount. However, the placement attracted about 30 investors and the CB between 40 and 50, with minimal overlap between them. Notably though, some investors who normally buy CBs chose to participate only in the equity leg this time, which is perhaps a reflection of the fact that the CB itself was structured as an outright play with no hedge for either the credit or the equity option.

Still, the CB attracted orders from about two-thirds of the top Tier 1 accounts that are active in the Asian convertible market. Most of the demand came from Asia, with some interest from Europe. Great Eagle Holdings bought 50% of the CB to reduce its potential dilution, but one source stressed that its participation ôwas not necessary to get the deal doneö. The sponsor didnÆt buy any of the equity, but the $361 million worth of new units that it is taking up as part of the wider financing package will prevent its current 48.7% stake from falling.

The placement, unlike the CB, was open to onshore US accounts and did receive some orders from there. One source says the demand was ôheavily weightedö towards long-only mutual fund-type investors, including real estate specialists from Australia and the US who had met with the Reit management during its extensive roadshows over the past three months to explain the benefits of the Langham Place acquisition.

The attraction, observers say, is that Langham Place, which it is buying from its sponsor, will transform Hong Kong-listed Champion from a single-asset Reit û its only asset at the moment is Citibank Plaza, a grade-A office building near Hong KongÆs prime Central area û to a more diverse vehicle in terms of location, tenant base and income streams. It will also boost its asset value to about $5.3 billion and make Champion the third largest Reit in Asia outside Japan, measured by market capitalisation. The only two that will be larger are Hong KongÆs Link Reit and CapitaMall Trust in Singapore.

To help overcome the potential scepticism about the property sector, the Champion CB was secured on the Langham Place property, using a structure similar to the one used on a CB issued last week by SingaporeÆs largest Reit, CapitaMall Trust. In this case, however, the bondholders share the security with the banks providing the loan. The CB also includes a number of financial covenants and protection for the bondholders should Champion decide to sell part or all of Langham Place during the life of the bond.

The placement price was fixed at the bottom of the indicated range of HK$3.60 to HK$3.80, for a 6.5% discount versus TuesdayÆs close of HK$3.85. According to the term sheet, this translates into a 41% discount to net asset value and a proforma 2008 dividend yield of 9.5%. The latter is based on the enlarged property portfolio and includes a special dividend û currently estimated at nine HK cents per share û that results from the unwinding of the interest swap agreements and dividend waivers that were put in place at the time of the IPO two years ago.

Based on the final price, the number of new units to be issued was fixed at about 823.3 million.

Turning to the CB, the 25% conversion premium was fixed over the discounted equity placement price for an initial conversion price of HK$4.50. Based on the latest closing price, the effective premium was no more than 17%, however. The initial range indicated a premium of up to 32%. Meanwhile, the yield-to-maturity was fixed at the top of the 4.75% to 5.25% range. One source notes that the orders were largely focused around these final levels, and there was no real question about where the price would end up.

The bonds have no put, but can be called by the issuer after three years, subject to a 130% hurdle. The coupon was fixed at 1% at launch.

Market participants say Citi was indicating a credit spread of 200bp over Libor, which is below the 250bp spread indicated for the CapitaMall transaction last week. Goldman Sachs, which was the sole bookrunner for that deal, offered credit protection at that level, but saw very few takers with some saying the spread was too wide. At present, CapitaMall is trading at Libor plus 200bp. However, the fact that Champion is an unrated credit, while CapitaMall is rated A2 by MoodyÆs, that this deal is two years longer than CapitaMallÆs effective three-year maturity and that CapitaMall is currently three times the size of Champion, meant many investors felt there needed to be a spread difference and thus chose to use Libor plus 250bp for this transaction.

At that level (250bp), the bond floor ended up at about 95.5% and the implied volatility at around 23%, which compares with a 100-day historic volatility of 34%. If the credit spread is pushed to 200bp, the bond floor will increase to about 98%. Other assumptions included a stock borrow cost of 5% and protection for dividend yields above 2.5%.

Having been quoted at about 99.5 in the grey market when the deal hit the screens after the Hong Kong market closed on Tuesday, the CB traded at about par yesterday, suggesting that the pricing was just about right. The trust was suspended from trading yesterday, however, which means any potential downward adjustment of the unit price following the placement is still to come.

ChampionÆs unit price had fallen for five straight days before the deal and as of TuesdayÆs close was only 4.3% above the 52-week low of HK$3.69 that it hit in mid-March. It is off 21% from its January high of HK$4.85.
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