PROPERTY COMPANY FINANCE
Bonds with sub-2% coupons secure cheap debt for GPE and Derwent, writes Virginia Blackburn
A combination of pent-up investor demand, a recovering property market and equity market performance have allowed two listed property companies to raise money on exceptionally cheap terms in the convertible bond market.
In July, Derwent London raised £150m through a six-year bond paying 1.125% semi- annually, with a £33.35 per-share conversion price – a premium of 35%. It was followed in September by Great Portland Estates, which issued one of the lowest paying convertibles ever launched in the UK. The company, which owns and develops real estate in London’s West End, raised £150m of five-year notes, paying a 1% coupon and a £7.145 per-share conversion price, representing around a 35% premium.
Hansteen also raised €100m of five-year bonds, again on very attractive terms, paying 4% over five years. Last year, the average coupon paid by European property companies was about 5%. “The climate for these issues is right, as there has been a shortage of good-quality convertibles,” says Deutsche Bank analyst Martin Allen. “Convertible bond funds have had plenty of capital and a relative scarcity of good-quality convertibles to invest in.
“While historically, property shares’ volatility has been insufficient to allow the issue of convertible bonds with a conversion price high enough to avoid diluting the net asset value per share, the recent shortage has meant investors have been prepared to invest in bonds for which the conversion price is higher than the option value suggests.”
But, of course, issuing companies have managed to do exactly that. “We were looking to diversify our sources of debt,” says Damian Wisniewski, finance director at Derwent, the first property company to issue a convertible in this cycle, in June 2011. “Before it was all provided by banks, but in this brave new world we have to look elsewhere. We like these bonds as the debt is unsecured, there is no need for corporate covenants and our strong share price meant we could issue with a 30% premium. Given that the shares were trading at a 20% premium anyway, in effect it’s 50%.”
He points out that the share price will have to rise quite a lot before there is any dilution to existing shareholders. The proceeds of the issue will be used as part of a larger refinancing strategy, with the second part being a £550m, unsecured revolving credit facility. Wisniewski also estimates that given that the debt is unsecured, the company does not have to worry about charges, gearing covenants and interest cover covenants, so is probably making an annual saving in the region of £500,000 in legal fees alone.
Five-year money at lowest-ever coupon
Nick Sanderson, finance director at Great Portland Estates, also cites pricing as by far the most attractive reason for the bond issue. “We could borrow five-year money paying the lowest ever coupon at a high conversion rate,” he says. “The conversion was 35% above our share price, the highest ever achieved and effectively a 54% premium to NAV.”
Sanderson says the issue fits well with its funding model, as about two-thirds of GPE’s debt is unsecured. “It has two attractions: it allows us more operational flexibility in managing assets, and since the 2008-09 downturn, pricing is better if we borrow on an unsecured rather than secured basis.”
Two-thirds of the company’s debts come from non-bank funding, including the convertible bonds, US private placements and a bilateral loan from Canada. The money will fund three developments: a 100% pre-let central London scheme; a Southbank office complex; and an office and retail scheme in Walmer House on Regent Street.
Another advantage in issuing convertible bonds is visibility. Morgan Jones, chief executive of Hansteen, which recently issued its first ever convertible, says that to date all its debt has been secured. “But we are a growing company and when our market cap went over £500m, that’s the range for unsecured bonds,” he says. “Banks have been unreliable and we wanted diversification in funding. Also, having done a convertible, we are now better known to the market. In the future we might be able to do a straight bond.”
This issue was in euros, as 70% of the proceeds will refinance bank facilities and pay debts in Germany. The rest will help pay for its 26.3% stake in the Ashtenne Industrial fund. The issue’s euro denomination also acts as a hedge: the company has assets in euros, so having debt in euros guards against currency movements.
Ironically, given that GPE, Hansteen and Derwent all cite banks’ reluctance to lend as a key factor for issuing convertibles, they agree that banks are opening up for business. None of the three have immediate plans to issue more convertibles. “I doubt we’ll do another, but it has acted as a stepping stone for unsecured debt,” Morgan Jones says.