With equity markets around the region remaining somewhat unpredictable and the Japanese central bank having joined the reflation party earlier this month, it is not surprising that investors are still attracted to yield.
We see it in the debt market, where high-yield bond offers are attracting billions of dollars of demand and we saw it in the popularity of Mapletree Greater China Commercial Trust’s $1.3 billion initial public offering in February.
Issuers are of course keen to tap into this. In Hong Kong, at least three property developers are queuing up to monetise part of their hotel portfolios through a business trust-like structure that allows them to pay dividends based on cash flows as opposed to their bottom lines, thus resulting in a higher yield for the unitholders — including the sponsoring developers themselves.
And in Singapore, where it is possible to list actual business trusts, three separate sponsors are currently preparing to launch such IPOs. Together they are looking to raise close to $2 billion over the next few weeks and will be offering a yield-focused alternative to the billion dollar plus SOE-type IPOs in Hong Kong by Sinopec Engineering and China Galaxy Securities, which are all about capital growth.
What makes the three Singapore trusts extra interesting is that they are offering investors two new asset classes, plus a variation on a theme. They are also helping to broaden the scope of the business trust market in the island state as they are all comprised of non-Singapore assets.
It remains to be seen whether investors embrace this or not. Singapore-listed trusts with overseas assets have in the past presented a challenge for global asset managers in terms of which of their many funds the trusts ought to be included in and many have chosen to avoid the issue by staying away altogether. There is also the additional issue of foreign exchange risks to take into account.
The largest of the three is Asian Pay Television Trust (APTT), which is in the process of acquiring cable-TV company Taiwan Broadband Communications that is currently owned by two Macquarie funds. Once the acquisition is completed it will sell 97% of the trust to public investors with the aim of raising as much as S$1.4 billion ($1.1 billion).
It is joined by Investec Aviation Trust, an airline leasing business that is sponsored by Investec — an asset manager and specialist bank with its roots in South Africa. The trust is seeking to raise up to $500 million plus a greenshoe, although 30% of that, or about $150 million worth of units, will be taken up by the sponsor and other investors who are the current owners of some of the aircraft that will go into the trust.
Bankers are currently doing investor education for both these vehicles with the aim of launching the institutional bookbuilding in early May.
However, it looks as if they will be preceded by the third trust — the Croesus Retail Trust — as sources say it will skip the pre-marketing and go straight into the institutional bookbuilding. According to the current plan, it will kick off on Thursday this week.
The reason for the accelerated timetable is that Croesus initially planned to come to market in the fourth quarter last year and did do pre-marketing then. But it never launched after India-focused Religare Healthcare Trust had a very poor trading debut following its $416 million IPO in Singapore, making investors hesitant to look at other business trusts.
Its return to the market seems a lot better timed, particularly when considering that Croesus focuses on shopping malls in Japan. Shopping mall operators are popular in Asia as they are viewed as key beneficiaries of the dual regional themes of domestic consumption and a more affluent middle-class. Investors also cannot seem to get enough of Japan at the moment, even though the Nikkei 225 index has risen a massive 57% since mid-November, including a 13% gain in April alone.
That compares with a modest 4.5% gain in the Singapore Straits Times index so far this year, and a 2.7% decline in Hong Kong’s Hang Seng Index.
Croesus is looking to raise about S$400 million ($320 million) and sources say the bookrunners have already lined up demand for pretty much all of that.
Asian Pay Television Trust
The decision to list Taiwan Broadband Communications in the form of a Singapore business trust comes on the back of a strategic review by one of its two owners — Singapore-listed Macquarie International Infrastructure Fund (MIIF) — that aimed to generate more value for its own shareholders. The review concluded in December that the most value would be had by divesting existing assets, including its 47.5% stake in Taiwan Broadband Communications, distributing the proceeds and all existing excess cash to MIIF’s shareholders, and winding down the company.
Since then, MIIF and Macquarie Korea Opportunities Fund (MKOF), which owns the rest of the Taiwanese cable-TV company, have jointly been exploring various divestment options, including a trade sale, and have now settled on a spin-off through an IPO. It will be the first business trust in Singapore to focus on media assets.
MIIF and MKOF will both sell their entire holdings in Taiwan Broadband Communications to the trustee-manager of APTT, which is wholly owned by Macquarie and will retain 3% of the trust after the IPO.
In a statement published on the Singapore Exchange website on April 4, MIIF said a business trust is the most suitable listing vehicle for businesses such as Taiwan Broadband Communications, which tend to generate stable cash flows in relatively low-risk operating environments. And it added that it views Singapore as a favourable listing destination given its position as “one of the most internationalised exchanges in Asia” when it comes to the domicile of issuers. It is also the regional base for a large number of global funds.
MIIF will seek approval from its shareholders at a special general meeting on April 30 to sell Taiwan Broadband Communications to the APTT trustee-manager at a minimum valuation of S$469.5 million (after transaction costs), which equals the book value of the stake at the end of December minus 5% that will cover divestment-related expenses. All the proceeds will be distributed to its existing shareholders, who can choose to receive their proportion of the divestment either in the form units in APTT or in cash.
Taiwan Broadband Communications was set up in 1999 and is one of the top-three cable-TV operators in Taiwan. It owns interests in five cable-TV networks that each has a monopoly on providing cable-TV services in their respective regions.
According to a source, the company is forecast to generate 3% to 4% Ebitda growth and 5% to 6% distribution growth per year. APTT is expected to offer a dividend yield of about 8% in the IPO.
Investec Aviation Trust
Investec Aviation Trust will own 26 aircraft at the time of listing, including six that are being acquired from an existing private equity fund managed by Investec. It will include aircraft leased to airlines based both in Asia and elsewhere in the world, and will be the first aircraft leasing business to list in Singapore.
Contrary to the provision of cable TV, which is a fairly straightforward business to understand, aircraft leasing may take a bit more work for investors to get comfortable with. One key aspect is that provides exposure to the expected growth in airline travel, without the volatility of the airlines themselves, which are highly sensitive to the movement in oil prices among other things.
At the same time, investors will have to take into account the depreciation of the aircraft and the cost involved in renewing and replacing the fleet to keep it attractive to the airlines.
According to a source, the management has a critical role in assessing the credit of the counterparties and in being able to market its fleet, particularly when it comes to finding new homes for aircraft whose leases are expiring.
Observers note that the aircraft leasing industry is expected to continue to grow as airlines are under pressure to de-lever and increase their return-on-equity. And Investec Aviation Trust is expected to grow its fleet to about 40 planes in the next three years.
According to sources, the trust will offer a yield of 8% to 9% and may well generate an additional 3% capital growth on top of that.
Croesus Retail Trust
Croesus will stand out versus Japanese real estate investment trusts (Reits), not just because of its focus on shopping malls (the majority of J-Reits tend to focus on residential homes or offices), but because it is expected to offer a yield of about 8%. That compares with an average of about 3% for the J-Reit sector.
The size of the offering will be smaller than when Croesus tried to come to market last year as it only includes four of the original seven assets. The reason is that the options to acquire the other three shopping malls have expired since the previous listing attempt.
The bookbuilding is expected to last for eight to nine days. Citi and DBS are leading the deal.
Aside from the geographical cross-over, a key challenge for all three of these trusts will be to overcome the fact that previous Singapore business trusts have, contrary to the locally-listed Reits, generally performed poorly in the secondary market, leaving investors disappointed with the asset-class.
One reason, noted a source, is that they have, with one notable exception, been quite small and that their cash flows haven’t been stable enough, making them too volatile. A second reason is that many of them have included quite a lot of financial engineering to enhance the yield in the first few years, resulting in a sharp drop-off in the returns once that comes to an end. According to sources, neither of the three trusts that are about to hit the market will involve such structuring.