Was it a CB or was it a CMBS? Ascendas REIT combined the two to end up with an unusual Triple A rated secured deal that set a new model for the Singaporean market.
The S$300m (US$215m) CB for Ascendas REIT in mid-March introduced a new funding mechanism to the Singapore property trust sector.
It was the first time an equity-linked fundraising had incorporated elements of a CMBS, and its successful execution opened a new alternative for a sector that had struggled to raise cost-effective funding following the collapse of the securitisation market.
A-REIT’s seven-year put five CB used a structure – named exchangeable collateralised securities by sole-bookrunner Citigroup – that mimicked a CMBS and was intended to help A-REIT diversify its funding sources and secure long-term financing at a relatively low cost.
The ECS were rated Triple A and were interest-only, a standard feature of CMBS. Ruby Assets, an SPV, issued the ECS and will lend the proceeds to A-REIT. Some 19 Singapore industrial properties under the control of A-REIT have been pledged as collateral at an initial loan-to-value ratio of 39.4%. The securities have an expected maturity of February 2017 and a legal final of February 2019 with the two-year tail allowing for the orderly sale of secured assets in the event that noteholders are not fully repaid by the scheduled maturity.
Marketed initially at a coupon and yield-to-maturity range of 1.6%–2.1% with the conversion premium shown at 20%–25% above the S$1.96 reference price, the deal finally priced at 1.6% with a conversion premium of 25%.
The result was much better than anything A-REIT could have achieved through the loan or the bond markets. At the time, bankers estimated that A-REIT would have had to pay some 3.5%–3.8% for an unsecured five-year plain vanilla Singapore dollar bond, or a spread of 200bp–250bp over SOR for a five-year syndicated loan. In late January, A-REIT raised S$150m through a three-year loan at an all-in 215bp over SOR.
Bankers said that, even if A-REIT had tapped a standard CB with a comparative tenor in March, it would have had to value the bonds at around 300bp over Libor. The collateralised nature of the ECS, however, achieved a Triple A rating for the notes, and investors worked off a credit spread assumption of around 125bp over SOR or even lower.
The deal also helped A-REIT reduce “its reliance on any one type of debt funding to less than 30%”, said a company official in March, and lengthened its weighted average debt maturity to 4.5 years from 2.4 years.
“If and when converted to ordinary units, there will be some dilution on distribution per unit, but, with the enlarged equity base, gearing will be lowered, thereby creating additional debt headroom for future growth, which could provide further accretion to DPU,” said the official.
It was still a lot of hard work for the leads because investors had to be educated about the new, complex structure. A comprehensive marketing and sales strategy to educate new investors on the structure and A-REIT’s equity story – both new to CB investors – was conducted. Also, the leads had to work through a concurrent consent solicitation process to take out A-REIT’s outstanding CMBS and transfer the underlying collateral properties to the exchangeable.
The redemption was done through a consent solicitation process and those responding early were offered a price of 99. The final consent solicitation participation rate was 86%, which fulfilled the 75% majority quorum and majority requirement.
The early redemption of the CMBS and issuance of the exchangeable allowed A-REIT to eliminate refinancing risk in 2012. It also extended its debt maturity profile to 4.5 years from 2.4 years.
In the end, around 70 accounts participated, leading to the book being covered 4.5 times and enabling A-REIT to price the transaction at the tighter end of the marketed terms.
For investors, the ECS proved attractive because of the security in the form of 19 properties, which stands in contrast to recent S-REIT CBs featuring only one property. The deal’s Triple A rating – the first instance of a CB in Asia Pacific receiving such a call from S&P and Moody’s – was another positive.
The high bond floor of 92 drew outright investors, while the liquidity in the underlying units made it easily hedgeable and appealed to hedge funds. The implied volatility worked out to 26%, the same as the historical 100-day volatility.
Bankers quickly predicted that the structure would be replicated by other Singapore REITs, and potentially by REITs in other countries looking to refinance outstanding CMBS, but that did not happen. Those with big balance sheets and strong sponsor support still prefer to tap unsecured funding. However, it introduced some welcome variety to the primary Asian CB market in 2010, and proved that CB buyers remain interested in new products.
Shankar Ramakrishnan