ARA Asset Management Limited, an Asia-focused real estate asset manager, has announced a new SGD perpetual issue this morning. Having offered some thoughts on the company previously in ARA Asset Management Ltd: Upcoming SGD Perpetual?, we'll now focus on the actual structure and latest price guidance in this update.
Structure of the new bonds
The new ARA perpetuals are structured as Perp NC5s, which are callable after 5 years (July 2022). In the event that the bonds are not called after 5 years, a coupon rate reset will only occur at the end of year 7 (July 2024) based on the prevailing 7-year SGD Swap Offer Rate plus the initial spread, although a 300bps step-up will also be applied to the new coupon rate, which is a fairly steep penalty for ARA to keep the bonds outstanding beyond the 7 year mark. The coupon rate reset will occur every 7 years thereafter (based on the prevailing 7-year SGD Swap Offer Rate + initial spread + 300bps). Investors should note that the bonds are subordinated in structure, and the issuer has the ability to defer distributions, although deferred coupons are cumulative and compounding.
Investors should also note the change-of-control call feature, which will be triggered if the members of the existing consortium (John Lim, The Straits Trading Company Limited, Cheung Kong Property Limited, Warburg Pincus LLP and/or AVIC Trust) cease to own at least 30% of the company. If not redeemed upon a change-of-control event, the coupon on the bonds steps up by 300bps.
Our comments
Our initial thoughts were for the new ARA perpetuals to have a structure similar to Starhub's STHSP 3.950% Perpetual Corp (SGD)s or Mapletree's MAPLSP 4.500% Perpetual Qsov (SGD)s where the coupon reset only kicks in after 10 years; the new ARA perpetuals have a coupon reset at the 7 year mark, which, combined with a rather hefty 300bps coupon step feature, offers some comfort that ARA will elect to call the bonds by year 7.
In addition, pricing for the new ARA perps appears a little higher than our initial thoughts – at the prevailing 7Y SGD SOR rate of 2.1025%, this translates to an initial spread of around 339bps, which is ~100bps over the rest of the higher-quality Singapore REIT perp universe, and at a comparable pricing to First REIT's FIRTSP 5.680% Perpetual Corp (SGD)s which are currently indicated at +340bps over swaps. While not a direct comparable to other perpetuals in the REIT sector (as described in our previous update), we still think the new ARA perpetuals offer good relative value (while providing a fairly high yield on a standalone basis), possibly a function of the privately-held nature of the firm (following its recent delisting), the presence of a private equity firm (Warburg Pincus LLP) as the company's largest current shareholder which may raise concerns about the potential levering up of the company's balance sheet, as well as ARA's global expansionary plans, which may also tax the firm's finances.
While these are valid concerns, we think investors may be overlooking the firm's rather strong balance sheet (almost negligible net debt position, as of end-Dec 16), resilient cash flow generation ability owing to the nature of its business, as well as a sizable holding of separable and fairly liquid assets (primarily holdings of REIT units, and to a lesser extent, seed capital in real estate funds) which can be monetised in various forms if the need arises. As we've discussed in These Are the Top Performing New SGD Bond Issues in 2017 (So Far), the new issue market (primarily for maiden issuers, like in the case of ARA Asset Management) offers investors with an opportunity to gain access to potential "new issue premiums", and we think such a yield premium can be found in the pricing for the latest ARA SGD perpetual.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in FIRTSP 5.680% Perpetuals. The analyst who produced this report holds a NIL position in the abovementioned securities.
