Suntec Reit raising $341m to repay debt
Business Times, March 20, 2014
SUNTEC Reit is issuing 218.1 million new units at $1.605 apiece in a private placement.
The move will increase the unit base by 9.7 per cent. Analysts say this will dilute distributions per unit by 3.9-8.4 per cent from FY14 to FY16.
Although the Reit said the $341.4 million in net proceeds raised will go towards repaying its existing debt, analysts flagged imminent acquisitions as a more likely scenario.
"Suntec could be amassing gunpowder for future acquisitions in either Singapore or Australia," Maybank-Kim Eng analyst Ong Kian Lin said.
Possibilities abound. UOB-Kay Hian analysts Vikrant Pandey and Terence Khi suggested these could include further acquisitions of Grade-A assets in Australia gateway cities, including Sydney and Melbourne.
"In Singapore, Suntec Reit could potentially explore the acquisition of the Straits Trading Building, or to further raise its stake in Suntec Convention Centre from its current 61 per cent. The additional funds could also be used to finance a potential asset enhancement initiative at Park Mall."
The Reit itself did not rule out that possibility. Noting that the issuance will improve its capital structure and credit profile, it added that the fund-raising exercise will "provide Suntec Reit with greater financial capacity and competitive advantage to capitalise on potential growth opportunities".
The issue price per unit, after a book-building process, is at the upper end of a $1.575-$1.615 indicative range and represents a 4.7 per cent discount to its volume weighted average price for trades done on Tuesday.
The Reit had announced an advance distribution of 2.096 cents per unit for the period from Jan 1 to March 26, 2014, prior to the issue of new units.
UOB-Kay Hian analysts put the issue price discount at 3.5 per cent after adjusting for the advance distribution.
Suntec Reit said the issue is likely to reduce its gearing from 38 per cent to 33.8 per cent. Its aggregate leverage will also improve from 39.1 to 35 per cent.
"Following the completion of the private placement and the completion of the refinancing of the loan due in June 2014, Suntec Reit will have no further debt refinancing needs until 2015, and the weighted average term to expiry of Suntec Reit's debt will increase from 2.4 years to 3.6 years," it said.
Moody's Investors Service analyst Jacintha Poh yesterday called the move "credit positive", noting that the Reit has raised $310 million from its medium-term notes issuance in January and March this year and is now closer to fully refinancing its 2014 debt maturities.
But Maybank's Mr Ong found it a "costly way to shrink debt". He downgraded the stock to "hold" and trimmed his target price from $1.75 to $1.63, after factoring in the consequent dilution.
Suntec Reit lost 4.5 cents, or 2.7 per cent, to finish the day at $1.645 yesterday. Some 31.8 million units changed hands, making it one of the most actively traded securities yesterday.
Mr Ong said: "$350 million shares placement at 7.6 per cent cost of equity is an expensive way to pare down debt given depressed stock (prices) ... the cost is hardly trivial."
"As of end-December 2013, its all-in financing cost was 2.5 per cent while its cost of equity stood at 7.6 per cent, based on our estimates. Its most recent $110 million medium-term notes, due 2020, was also issued at coupon rate of 3.35 per cent, a 55 per cent discount to its cost of equity."
He explained that between debt financing and equity financing, the former is cheaper because the risk to debtholders, who enjoy default rights, is lower.
"Reits usually do equity fund-raising for acquisitions because yield-accretive assets can improve future returns. You are actually pumping in money for investment. When you just raise equity to pay down debt, it is generally frowned upon because your cost of debt in this low-interest environment is low. Your cost of equity is always higher. If you can raise money from the debt side at low cost, why would you want to do it on the equity side?"
And even if Suntec Reit did acquire Straits Trading Building, which was valued at $400 million by Knight Frank in 2013, it will be challenging to make it yield-accretive, given that city-area office prices are above 2007 peak levels, he said.