Paraprop is burdened by a heap of B class debentures that keep getting converted to linked units and diluting the current unit holders' position. That's not the way it was meant to be. The B debentures were created as a deferred portion of the purchase price of an investment property.  For instance, if an office building cost R10m, the seller would receive R8m in cash and R2m in deferred debentures.

If the initial yield on the property was, say, 12%, the deferring of the R2m interest-free would push the initial yield to unit holders up to 13,2%,
making investment in Paraprop more attractive.  One-fifth of the debentures is converted to linked units each November until 2005.  But this assumed that Paraprop's highly rated management would be able to build a substantial property portfolio and a decent market capitalisation. This would push its value up and neutralise dilution of value as the debentures were converted to units. It wasn't their fault that interest rates and listed property yields rocketed (and therefore values plunged). But it halted any further property purchases and Paraprop was stuck as a microcap counter. 

The market has been punishing it for that (see graphic opposite) and the next R20m worth of debentures due for conversion in November could have triggered a takeover or a breakup and cancellation of the management contract. A private asset management company, Spire, is contracted to run the business .MD Rodney Squire-Howe and director Bruce Kerswill own Spire and are employed by it rather than the fund.  Absa is taking up R17,5m of new linked units in Paraprop at market price, in exchange for Growthpoint units and about R31m
in cash. The current price of 340c/unit is 29% below NAV of 481c. As Paraprop is at a dividend yield of over 20%, the Growthpoint units at a
yield of 11,1% would be dilutionary, so Paraprop is likely to sell them. Absa is also getting a 50% stake in Spire for nothing, a further indication that this could have been the primary purpose of the deal.  Why is Absa buying? As Paraprop's biggest lender, it would be looking after its own exposure. And Absa is following a trend among banks of tying in certain listed borrowers by taking equity in them: Standard Bank with Hyprop and other funds in the Corpcapital stable, for instance, and Nedbank with Sycom. 

The equity is also an important enhancer of yield on lending. Banks usually lend about 70% of a property's cost, on which they get a 2% margin. By taking equity with a 20% yield in the case of Paraprop, they get a far better overall return for their risk.  But is it in the interests of current unit holders? Absa commercial property finance GM Jeff Cannings argues that the extra capital will be quickly used by Paraprop's highly rated management, to counter the ongoing B debenture dilution with better income. Kerswill does not agree with the FM's assessment of the motivation behind the transaction.  "While we have been burdened with our financial structure due to the lack of growth in our property portfolio and material vacancies last year," he says, "the prospects for next year are far better. The break-up of Paraprop is not an option, due to the particularities of the B debenture trust deed, and this deal is undoubtedly in the best interests of shareholders.  "It provides us with a strong strategic partner and improves all the aspects that we have publicly stated as our strategy . We are not giving away half of Spire, but only sharing in the asset management of the fund."  Shareholders will probably accept the Absa deal. But the share price has not reacted to the announcement and unit holders may feel they would be better off by breaking up Paraprop and selling its properties.