DBS launches Capital Square securitization

Deal enables Ergo''s purchase of prime Singaporean office development.

DBS Bank is close to completing the S$505 million ($285.4 million) securitization that will fund the acquisition of the Capital Square commercial development by Ergo - one of Germany's biggest insurance companies - from Keppel Land and Rodamco Asia.

Capital Square, recently valued at $508 million by Colliers International, is located in Raffles Place in Singapore's central business district and is considered to be one of the prime commercial properties in the Lion City. The development, which has close to 100% occupancy, includes a 16-storey grade-A office building, home to the likes of Barclays Capital, Citibank and Morgan Stanley.

The transaction, issued through the Queensley Holdings Limited special purpose vehicle, has been split into two tranches and 808 million preference shares for the purchase of 100% stake in Capital Square.

Ergo has purchased all of the S$202 million junior bonds, together with the preference shares. If the deal performs better than anticipated, the shares allow Ergo to gain any incremental returns or a share of the profits should the company exercise its option to sell the property after three years.

In addition, S$303 million of senior notes were offered to local investors at a coupon of 4.50%, which a banker close to the deal say equates to a very healthy pick up of 180bp over swaps.

The seven-year deal, which was not rated, but still attracted strong interest from local investors, according to the banker. "It really was not necessary to rate this deal because investors are familiar with the product and the underlying asset," he says. "There is 2.4x interest coverage on the senior notes, who benefit from subordination on the junior piece. In the end, the transaction placed with a wide range of Singaporean investors: insurance companies, fixed income fund managers and high-net worth individuals."

DBS has previously arranged similar transactions to the Capital Square deal, namely the S$984.5 million deal that securitized 55% of the Raffles City development in June 2001 and the S$335 million securitization of Compass Point shopping centre that was completed last month. The bank sees more scope for securitization of commercial properties.

"This deal enabled Keppel Land to meet its goals of divesting by opening up the sale of the property to a broader class of investors," the banker says. "Securitization and the REIT structures that have come into play this year allow property companies to take a more leveraged approach to selling these types of assets. And securitization in particular is an area that has real growth potential, because it is one of the most efficient ways for investors to buy into prime real estate assets in Singapore."