Just when it thought it had bridged a S$300m (US$216m) funding gap and ensured its survival, MacarthurCook Industrial REIT faces the prospect that its proposed recapitalisation plan could be derailed by a rival trust.

MI-REIT has S$316m of obligations falling due at the end of December, in the form of a maturing S$226m loan facility and a S$90m acquisition of a property, 1A International Business Park, from Eurochem. Both obligations were extended from due dates earlier in the year.

MI-REIT’s recapitalisation plan involves raising S$217m in new equity through a S$62m placement and S$155m two-for-one rights offer.

But that plan has hit a snag. Cambridge Industrial Trust, which recently became a substantial shareholder in MI-REIT with a 9.76% stake, last week announced its intention to vote against the recapitalisation proposal, stating that it was heavily dilutive and was “massively value destructive”.

CIT said that if shareholders voted down the recapitalisation plan at an EGM on November 23 it would hold another vote no later than December 4 to appoint Cambridge Industrial Trust Management (CITM) as manager of MI-REIT as well.

CIT has not given details of its long-term plans for MI-REIT. Initially, CIT said that it valued MI-REIT at 1.1 CIT shares for every existing MI-REIT share, suggesting that it would push for a merger. It then ruled out merging the two trusts (at least for the next six months) and said it would run them side by side.

However, it emerged late last week that this was not possible for regulatory reasons. A spokesman from the Monetary Authority of Singapore said: “REIT managers are required to conduct their business in such a manner as to avoid conflicts of interests. This would include any potential conflicts arising from the competing interests of unitholders in different REITs.”

CITM finally acknowledged on Friday evening that it would not be allowed to take over management of MI-REIT, but urged shareholders to vote against the recapitalisation plans anyway. The saga suggests either that CITM did not do its homework before launching the bid to install itself as manager of MI-REIT, or that it never intended to become manager of MI-REIT in the first place.

Early last week, Chris Calvert, chief executive of CITM, said that he was in the process of finalising refinancing and equity solutions for MI-REIT, but would not give details nor name the banks involved.

Announced on November 6, MI-REIT’s current recapitalisation plan involves Australia’s AMP Capital buying 78.6m shares for S$22m and a group of cornerstone investors including APG and Tolaram, the owner of Eurochem, taking up 142.9m shares for S$40m. The placement price of S$0.28 per share represents a 31% discount to the November 5 close.

The recapitalisation plan would also see AMP Capital acquire a 50% stake in both the manager and the property manager and also sell four properties to MI-REIT. In return, it would sub-underwrite 20.7% of the rights issue, including its entitlement.

George Wang, who controls the AIMS Financial Group and MacarthurCook, and is one of MI-REIT’s largest shareholders, agreed to sub-underwrite around 4% of the rights units. Other cornerstone investors have all agreed to sub-underwrite some of the rights shares. The joint bookrunners and underwriters, Cazenove, Macquarie and NAB, said they would not underwrite the rights issue without these commitments. Expenses for the equity offerings are around S$11m.

The transaction would cut MI-REIT’s gearing to 29%, from 44% at present. It would also dilute other shareholders to 40% – after the cornerstone investments – from 73% currently.

Nick McGrath, chief executive of MI-REIT, said that the trust had looked at other financing options before settling on the recapitalisation proposal. “The only buyers were those who wanted unleveraged returns in excess of 25%,” he said.

Some banks had suggested issuing convertible bonds, but McGrath was concerned by the higher level of dilution these would present to existing shareholders upon conversion of those instruments.

Moreover, MI-REIT’s parent, MacarthurCook, is not strong enough to underwrite the entire offering as it has faced cashflow challenges back home in Australia, while MI-REIT does not enjoy strong banking relationships with domestic banks in Singapore. As a result MI-REIT has been heavily dependent on the two Aussie banks and now Standard Chartered, which has stepped in, bringing AMP Capital with it. (See Singapore Syndicated loans.)

CIT said in an SGX filing: “We are better off having MI-REIT wound up and its assets realised, given the MI-REIT NAV, rather than give support for the AIMS recapitalisation.”

It suggested that shareholders would probably receive more than S$0.28 per share if MI-REIT were to be liquidated, given that the NAV for each share was S$0.94 at the end of September.

However, it seems more likely that any asset sales would be done at prices far below NAV. In any case, MI-REIT’s lenders and Eurochem would have priority over shareholders.

Calvert said that if MI-REIT were to be dissolved, the intention would be to sell its assets on the open market, but did not rule out buying them for CIT.

CIT is said to have approached banks earlier in the year to prepare proposals for a merger with MI-REIT, and it made an unsuccessful merger offer to Wang shortly before buying a stake in MI-REIT.

CITM is owned by NAB’s nabInvest (56%), Oxley (24%) and Mitsui (20%). Three out of eight directors on the board are appointed by NAB.

Interestingly, NAB is also involved with MI-REIT, through its wholesale banking division, as a lender as well as an underwriter of the proposed recapitalisation.

NAB said in a statement: “Consistent with standard industry practices, NAB has strict Chinese walls in place to manage potential conflicts of interest. NAB has appropriate conflict management arrangements between NAB wholesale banking and nabInvest.”

In a further twist, Calvert held the chief executive’s position at MI-REIT’s management entity, MIM, before leaving last year. He was in charge when MI-REIT agreed the unfunded acquisition of 1A IBP from Eurochem for S$90m.

To add to the complications, shareholders have accused CIT of not being clear about the proposed use of proceeds of a S$28m placement it completed in July. CIT said the funds were for asset enhancement and later used part of the proceeds to buy its stake in MI-REIT.

http://www.ifrasia.com/battle-of-the-reits-cit-squares-up-to-mi-reit/91006.article