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Switching from bank loans to bonds
With more future transactions, AA REIT sees better pricing for its issues 

McGrath: We've got a lot of happy investors sitting on large paper gains

While it is significantly more expensive to raise funds on an unsecured basis through bond issues, AIMS AMP Capital Industrial Reit believes the benefits of diversification and longer tenor outweigh the increased costs of borrowing as it restructures its loan book. – By Bayani Cruz

AIMS AMP Capital Industrial Reit (AA Reit), a Singapore-based Reit (real estate investment trust), has launched its second bond issue in four months, indicating a definite trend among Reits to switch some of their financing from bank loans to fixed income bonds.

For Reits in general, the move to fixed-income bonds as part of re-financing their loan books is being pursued in anticipation of a reduction in bank loan portfolios, as banks beef up their capital positions to comply with Basel III requirements. 

Although AA Reit has had no difficulty obtaining financing from its consortium of creditor banks, the banks themselves encourage clients to diversify their loan books to include fixed-income assets, according to Nicholas McGrath, chief executive officer of AA Reit.

“From our point of view, we have no particular trouble in obtaining bank debt because we have a syndicate of five banks that have committed to lend us a total of S$330 million. Our syndicate is led by UOB (United Overseas Bank) and Standard Chartered Bank. We also have Commonwealth Bank, ING Bank and Maybank in that facility, so we have a spread of both local and international banks,” McGrath says.

Bond financing allows the issuer to acquire funds on a longer tenor and on an unsecured basis or without collateral requirements. A bank loan is almost always on a secured basis. Since the assets of Reits are locked up in real estate, which are by nature long-term investments, diversifying some of their financing to bonds makes sense.

With this rationale, AA Reit on July 25 2012 launched its S$500 million multi-currency medium term notes (MTN) programme, a facility for issuing bonds.

On November 29, it announced it will be issuing S$30 million seven year unsecured 4.35% fixed rate notes (FRN) by way of private placement. This is the second bond issue it has made under its MTN programme in four months. 

The first bond issue, a S$100 million 4.9% FRN with a four-year maturity launched in August 2012, was well received by investors, trading as low as 3.5% in the secondary market.
“It was a first time issuance, so the banks leading the transaction advised my board and myself that as a first time issuer, there is a first-time issuer premium that was paid,” McGrath explains. “I didn’t want more money because I had a fixed used for the proceeds: pre-paying bank debt due in October 2013. The whole point of it was to broaden and diversify our funding sources and try to extend the tenor of our debt.”

In terms of its secured borrowing from the banks, AA Reit typically pays about 30bp all-in which is significantly less than the 4.9% it has to pay for its S$100 million four-year bond issue. But McGrath believes it was worth it.

“Frankly, it was significantly more expensive to borrow unsecured. But as a first time issuer, the benefits outweigh the costs because of the diversification. Borrowing unsecured and achieving additional tenor on our debt outweighed the cost of essentially increasing our cost of debt. And we are pleased that our bonds traded well in the market. We have got a lot of happy investors out there who are sitting on large paper gains,” McGrath enthuses.

Attractive profile
The success of its bond issues so far has been anchored on the company’s total assets of S$975 million as of September 2012, and its profile as a listed firm on the Singapore Exchange (SGX). In addition, it enjoys an investment rating of BBB-minus from Standard & Poor’s.

AA Reit was originally listed as Macarthur-Cook Industrial Reit in 2007. The Reit’s former sponsor, Macarthur Cook, was acquired by the Sydney-based AIMS Financial Group in July 2009 which resulted in the latter being the Reit’s new sponsor, together with AMP Capital. The Reit’s investment strategy is to own and invest in a diversified portfolio of income-producing industrial real estate assets in Singapore and Asia with a focus on warehousing and logistics centres, manufacturing facilities, business parks and hi-tech spaces.

At present, the firm is investing exclusively in Singapore where it has 25 properties valued at S$965.7 million as of the second quarter of financial year 2012. In July 2011, the Reit announced it was redeveloping 20 Gul Way, a warehouse project with an expected 1,159,536 sq ft gross floor area upon completion that will quadruple its annual rental income to S$16.3 million (when completed) in December 2013. Phase one of this development obtained a temporary occupation permit on October 29 2012. AA Reit accordingly expects a full quarter’s contribution from phase one in March 2013.

McGrath says the proceeds from the bond issues will not be used for acquiring new properties but exclusively for re-financing its bank debts.

As of September 2012, the Reit had total debt amounting to S$307.6 million with S$10.3 million due in October 2013, S$28.8 million due in February 2014 (which was repaid with the S$30 million issued FRNs), S$168.5 million due in October 2015, and S$100 million due in August 2016.

AA Reit has maintained a gearing ratio of an average 30%, well below its 45% bank covenant.
The company chief believes that it is a trend for Reits to diversify their funding sources to bonds as a means of reducing the borrowing costs.

“I think it’s becoming increasingly common. Many Reits have done it, particularly a number of Singapore government-linked company (GLC) Reits. The Mapletrees and the Capita-Lands and the Ascendases of the world, they’ve all done bond issuances over the last several years and I think they have been successful in achieving highly competitive pricing and longer tenor. We are an investment grade entity and I would hope that we will get better pricing as we do more transactions in the future,” McGrath remarks.
Source: The Asset December 2012

Switching from bank loans to bonds.pdf