The rights issue is fully guaranteed by its sponsors Keppel Corporation and Keppel Land, which jointly own about 72.7% of the Reit, and is the latest example of how Asian companies are choosing to raise funds away from the capital markets amid the volatile market conditions that have prevailed for the best part of the past six months. K-Reit initially planned to finance the S$951.4 million acquisition, which was first announced in July last year, through a combined equity and convertible bond offering, but those plans were scrapped in December and replaced by a S$942 million bridge loan provided by the sponsor group.
A week-and-a-half ago, The State Bank of India (SBI) raised $4.1 billion from a rights issue at a time when the Indian equity market remained under extreme pressure. The sizeable offering marked the lenderÆs first share sale in more than 10 years and took advantage of new guidelines to fast track the sales process for rights issues and follow-on equity offerings. Back in Singapore, commodities firm Olam International said on Friday that it aims to raise up to S$307 million ($222 million) from a preferential offering to its existing investors on the basis of one new share for every 10 held. And yesterday, hospital operator Parkway Holdings announced plans for a rights issue of up to S$785.7 million ($569 million) at a steep 39% discount to last FridayÆs close. Parkway is offering seven new shares for every 15 held.
K-Reit has set the price for its offering at S$1.39 per unit, which represents a discount of 8.3% versus the volume-weighted average price in the three days to last Friday. It is offering eight new units for every five existing ones, which will increase its number of units on issue by 160% and cut its gearing ratio to 27.7% from 53.9%.
This prospect of a lower gearing contributed to K-ReitÆs decision to go for a rights issue, as the trust is currently at risk of breaching the 60% gearing limit in the event the financial market conditions worsen and asset values fall. The rights issue will help to strengthen the balance sheet and enhance the trustÆs position to negotiate reasonable terms to refinance the balance of the bridge loan, a K-Reit spokesperson said, adding that the current high leverage is also hindering the trustÆs ability to undertake further acquisitions.
ôThe (K-Reit) manager is actively exploring a few acquisition possibilities (and) with a lower leverage it will have the additional debt capacity to fund new acquisitions,ö the spokesperson says.
Based on existing borrowings and the 60% aggregated leverage limit, K-Reit will have a funding capacity of about $492 million once the rights issue is completed.
In addition, a new share issue would be dilutive for the existing shareholders, which wasnÆt desirable since the stock is already trading at a huge discount to the end-2007 net asset value of S$3.78 per unit. According to the spokesperson, a rights issue will thus be ôa more appropriate method of fund raisingö as it will allow existing unitholders to participate in K-Reit AsiaÆs growth without any dilution of their proportional stake.
K-Reit has a mandate to invest in commercial properties across Asia, but its existing five properties (including Raffles Quay) are all located in Singapore.
Generally speaking, it should also be easier to convince existing unitholders to increase their investments in a company at a low price than to take on fresh exposure in a company whose share price continues to slide. K-ReitÆs unit price has fallen 48.5% from a peak of S$2.97 in early October and has only just bounced off a low of S$1.38 from March 14. Yesterday it closed at S$1.53.
K-Reit is looking to refinance the remaining S$390 million of the bridge loan through the issuance of new equity units of convertible bonds, for which it already has a general mandate from its unitholders. However, the loan doesnÆt mature until September this year, which gives it some time to wait for more favourable market conditions.
Convertible bond issuance is at a low right now, particularly because of the need to pay higher coupons and the difficulty to get banks to provide adequate credit protection, and a banking source notes that it is extra difficult for Reits to issue CBs since they are a bit more sensitive to how much of a coupon they can pay. ôIf they start paying coupons that are higher than the underlying dividend of the shares, it doesnÆt quite make sense, so they are probably a little more sensitive than other companies,ö he says.
At the end of February, Suntec Reit did, however, raise S$250 million ($179 million) from a CB sale through Citi and Deutsche Bank to help finance its one-third portion of the same Raffles Quay acquisition. And in Hong Kong, Champion Reit has announced plans to raise as much as HK$9.7 billion ($1.2 billion) from a combined CB and equity offering to pay for the acquisition of the Langham Place retail mall and office tower from its sponsor. The Champion fund-raising was approved by shareholders in early March, but the management and Citi, which is the sole bookrunner, are still looking for the right window to launch the deal.
One interesting aspect of K-ReitÆs rights issue is that ôin the interest of reducing the costsö the trust has decided to do it without the help of an external financial adviser or underwriter. The latter isnÆt needed, it says, because of the irrevocable undertakings by the Keppel group to buy all the units not subscribed for by other shareholders. If this practice is adopted by other issuers and rights issues continue gain in popularity, this could potentially become an issue for the investment banks, which arenÆt exactly busy executing deals these days.
However, Olam has appointed JPMorgan and Macquarie as joint lead managers for its preferential offering and Parkway has mandated OCBC and UBS as joint financial advisers and underwriters. Initially, K-Reit also enlisted DBS and UBS as joint financial advisers and underwriters for its planned equity offering.
K-Reit will trade on a ôcum-rightsö basis until April 3 and the books will close on April 8.