More tap into bond market

Posted On Wednesday, 14 December 2005 02:00 Published by eProp Commercial Property News
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More tap into bond market.

Norbert Sasse

The JSE's Property unit trust (PUTs) and loan stock companies (PLSs) are becoming increasingly innovative in finding cheaper alternatives to traditional bank funding. And it seems that tapping into the capital markets is fast becoming a preferred channel for those funds wanting to cut the cost of debt. 

Since November 2004 three funds have already raised finance through commercial mortgage backed securitisation (CMBS) programmes. (Securitisation, which forms part of structured finance, is a financial technique that combines assets to form a tradeable instrument.) Other listed funds are expected to follow suit by bringing similar CMBS transactions to the market in 2006.

Investors are the biggest beneficiaries of the new securitisation trend, as any savings made by listed funds through the refinancing of property portfolios flow directly to unit holders in the form of increased distributions.

Growthpoint Properties, the biggest loan stock on the JSE with a market cap close to R7bn, is the most recent entrant to the Bond Exchange of SA (Besa). The company launched a R5bn securitisation programme last month with an initial issue of five-year floating rate notes of R805m.

That followed loan stock Vukile's launch of a R2bn CMBS programme in October, with an initial issue of five- and seven-year floating rate notes of R770m. The Vukile securitisation followed the PROPS deal, whereby iFour placed R800m in November last year ? the first ever CMBS programme in SA.

Industry players agree that securitisation offers listed funds a significantly cheaper funding alternative to that offered by commercial banks. Growthpoint CEO Norbert Sasse says that its initial placing of R805m on Besa will result in a saving of between R6,9m and R9,3m/year, as the fund's cost of debt has been reduced by up to 1,16 %. Growthpoint was paying on average an (all-in) bank rate of up to 10,5% while the new (all-in) securitisation rate is 9,34%.

Sasse says that pre-securitisation, Growthpoint was expecting growth in distributions to be in the 5% to 7% band, but the savings made through lower borrowing costs means that distribution growth post-securitisation should increase to between 8% and 10%.

Vukile CEO Gerhard van Zyl says that the company's R2bn securitisation programme would reduce its overall debt cost from 11,16% to 10% after all upfront, ongoing and hedging expenses have been accounted for. However, Van Zyl says that though the securitisation benefits on the first issue of R770m would only be felt for five months of the current financial year it would nevertheless have a positive effect on Vukile's second-half and full-year results.

Vukile last week announced an 8,3% increase in interim distributions (to end-September), a level expected to be maintained for the full year to end-March 2006. Had Vukile's securitisation programme been in place for the March 2005 financial year, earnings and headline earnings per linked unit would have been approximately 5% higher than that reported, says Van Zyl.

Though nobody disputes the fact that securitisation is an attractive funding method for commercial property, analysts believe that the initial set-up costs of CMBS structures could deter new entrants.

Investec Bank capital markets head Nick Job says that for smaller funds, in particular, the structure could be costly and complicated to implement and these funds have to carefully weigh the savings benefit of lower debt funding against initial set-up costs.

However, Sabi Gordos, of Absa Corporate & Merchant Bank, says that investment banks are becoming more innovative in simplifying and reducing the cost of securitisation. In Madison Property Fund Managers' latest publication ? Property Innovation ? Gordos writes that the race is on to reduce the number of intermediary vehicles involved in creating CMBS structures and simplifying the financial, operational and other legal restrictions imposed by rating agencies on property company borrowers.

Gordos says that some banks are already starting to offer property finance via their asset-backed commercial paper conduit vehicles (essentially, ready-made securitisation structures raising funding on the short-term bond market) that aren't required to post bank liquids and reserves, thereby saving about 0,2%/year for borrowers.

But perhaps the most important benefit flowing from the securitisation trend is that it should encourage banks to become more competitive concerning their lending rates. Gordos says that most leading banks have already chopped about 0,5% to 0,6%/year off their lending margins for A-grade commercial properties this year in direct response to the challenge posed by cheaper bond funding.

Last modified on Thursday, 08 May 2014 18:59

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