Temasek infrastructure trust to price at the top of the range

Heavily oversubscribed CitySpring will pay a divided yield of 6.75% to IPO investors.
SingaporeÆs first business trust backed by infrastructure assets attracted strong demand for its initial public offering, according to sources who said the trust would fix the price at the top end of the S$0.77 to S$0.89 range.

Neither the trust nor its sponsor Temasek had confirmed the final price yesterday, but institutional investors who were informed of their allocations during the day said they had received units at the maximum price. They estimated that the order book would have been well over 15 times covered, as reported by the local Singapore press towards the end of last week.

This means CitySpring Infrastructure Trust will raise S$286 million ($186 million) from institutional and retail investors combined and will offer a divided yield of 6.75%. The yield is based on the estimated dividend payout for the first full fiscal year to March 2008.

According to sources, the majority of the institutional demand came from Singapore and Asia, but with sizeable orders from Europe as well. The trust wasnÆt sold to onshore US investors. Given the nature of the trust, long-only type investors with a long-term investment horizon were also said to be well represented.

The Temasek name was believed to have played a large role in terms of attracting investors and to have provided credibility with regard to CitySpringÆs plans to continue to grow through further acquisitions. At the launch of roadshow four weeks ago, Temasek said that CitySpring will be its key platform for infrastructure investments and added that it would consider co-investing with the trust in certain assets.

ôBoth the company and Temasek are committed to continue to grow the trust and Temasek has set up an internal team to help identify acquisition targets,ö notes one source who attended the roadshow. Temasek may also help warehouse potential assets that are at an early stage of development until they achieve a stable cash flow that is appropriate for including into CitySpringÆs portfolio, he says.

ôTemasekÆs mandate is to tap AsiaÆs growing economies and the growth of the middle class, and infrastructure hits the sweet-spot of both of those,ö the source adds.

The business trust is made up of gas and water utilities that were previously wholly-owned by Temasek and, according to observers, Temasek chose to set up CitySpring to take advantage of two new Singapore regulations.

By putting the assets into a business trust û which have a similar structure to real estate investment trusts - the company is able to pay out profits to investors from the free cash flow rather than from net profit, which prevents cash from getting trapped in the asset. For investors this also means a more predictable and stable dividend.

CitySpring is only the third business trust to list in Singapore after Pacific Shipping Trust, which is backed by cargo ships, and CDL Hospitality Business Trust, which is a dormant sister trust to the CDL Hospitality Reit, which is backed by hotel assets.

The second thing is the Singapore governmentÆs recent decision to provide a tax incentive for infrastructure players who raise funds in Singapore. As a result of this incentive, the dividends paid by the trust will be tax free for investors.

CitySpring sold a total of 450 million units of which 71.5% went to institutional and retail investors. The remaining 28.5% was bought by Temasek. Fidelity and Singapore-based investment firm Indus, which acted as cornerstone investors, bought a combined 13.5% of the offering with Fidelity getting 9% and Indus taking 4.5%.

The trust, which is being brought to market by DBS and Morgan Stanley, initially set an indicative price range of S$0.75 to S$0.89 which gave a dividend yield of up to 8%. However, before the retail portion of the deal was launched the bottom end of the price range was lifted to S$0.77 to reflect the strong demand and to confine the yield range within a 100 basis point spread. As a result the maximum yield was lowered to 7.75%.

There is also a greenshoe of 32.175 million shares, but this will come out of TemasekÆs initial share and wonÆt increase the total size of the trust. The investment company will see its stake fall to 21.4% if the greenshoe is fully exercised.

The split between institutional and retail investors hadnÆt been determined last night, but was expected to be close to the 80-20 ratio that had been indicated to investors during the roadshow.

At the final price the yield was slightly below that offered by Macquarie International Infrastructure Fund, which trades at a yield just above 8%. However, observers said investors tended to look at this deal more in terms of the relative yield versus the risk free rate and viewed that way the offer was quite attractive.

The 10-year Singapore bond yield currently trades at around 3% after falling from 3.6% in July, which means CitySpring provides a relative return of more than 350 basis points. Singapore-listed high-yield stocks also trade at a forward yield of about 6%.

Initially CitySpring will own 100% of City Gas Trust, which is the sole producer of town gas in Singapore û a monopoly that is likely to last until 2016, according to a syndicate research report. Its second asset is a 70% stake in SingSpring Trust, which is the owner of SingaporeÆs only large-scale seawater desalination plant. The plant has a contract with the Public Utilities Board to supply water in return for a monthly fee which is partly fixed, partly variable. The agreement will provide SingSpring with a predictable cash flow until it runs out in 2025.

The remaining 30% of SingSpring is owned by Singapore-listed Hyflux, which is one of AsiaÆs leading water and fluid treatment companies.

CitySpring will start trading on February 12.
¬ Haymarket Media Limited. All rights reserved.
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