Brisbane developer Sunland’s announcement last week that it would issue a $40 million bond has highlighted the development of a home-grown bond market for unrated companies which has given them an important new funding option.
The main mover in building the market has been Australian bond broker
FIIG Securities which recently passed the milestone of $1 billion in funding raised for more than 20 corporates including public and private property developers and investors (find out more
FIIG has raised the money by issuing bonds – which are a debt security similar to an I.O.U. – to its large base of private clients, SMSFs and institutions.
With interest rates at record lows, these investors have significant unmet demand for bonds from good companies paying more interest than a bank deposit.
Sunland's proposed Mariner's Cove development on Sea World Drive at the Gold Coast[/caption]FIIG has pioneered the market against a background of an undeveloped bond market in Australia, compared to Europe and even more so the United States where bond issues are the largest source of finance for property companies.
Since originating its first bond in 2012, FIIG Securities has raised money for a number of prominent property companies including Sydney-based property investment group
360 Capital, Sydney-based developer
Payce Consolidated, Brisbane-based developer
Stockwell, global infrastructure developer
Plenary, as well as its latest issue for
Stockwell's Muse development in Brisbane's West End[/caption]The companies had in common a desire to diversify their debt providers and extend its duration, two objectives which can be limited with traditional bank funding.
They overwhelmingly report that raising money with bonds was a positive experience.
360 Capital CFO Glenn Butterworth[/caption]ASX-listed 360 Capital, which has featured in the news lately because of its successful takeover battle for Australian Industrial REIT (ANI), raised $75 million through a 5-year fixed-rate bond issue in September 2014.
360 Capital Group Chief Financial Officer Glenn Butterworth said that the process of issuing the bond turned out to be faster and easier than sourcing funding from a bank.
“If you compare it to traditional bank finance it was a lot quicker,” Mr Butterworth said.
“Overall, the process was quick and relatively painless and the results were very satisfactory from our point of view.”
Mr Butterworth said that management received a lot of support from the group’s investors for trying something new and undertaking the issue.
“They obviously could see it allowed us to have capital available so that the group was well placed to take advantage of any opportunities arising within the property sector,” Mr Butterworth said.
Mr Butterworth said the group’s relationship with its bank remained strong throughout the issue.
Another bond issuer was infrastructure developer Plenary Group, Australia’s leading independent developer and operator of public infrastructure projects under the Public-Private Partnership model.
Since 2004, Plenary has closed 27 infrastructure projects worth $14bn.
Plenary raised $35 million through a bond secured against its interest in eight Australian Public Private Partnership projects including the Victorian Comprehensive Cancer Centre (feature image), the Melbourne Convention Centre, and Gold Coast Rapid Transit.
Chief Financial Officer Morné Swanepoel said Plenary’s decision was not based on immediate need but rather was an opportunistic move when they were alerted by FIIG to the option of a bond issue and realised the value on offer.
“For our corporate structure the banking market was quite uncompetitive and the bond structure that FIIG came up with worked well. To develop such a product is quite unique and ground breaking.”
“We used the capital for funding business growth and it helped us to bid for a few big projects which we subsequently won,” Mr Swanepoel said.
Plenary Group CFO Morné Swanepoel[/caption]Mr Swanepoel has always been a strong advocate of developing the bond market to allow private investors to fund infrastructure and other industries which are not well served by the banks.
“I think it’s a good thing for the market as a whole if we’ve got a strong bond market and there’s competitive tension between the bond market and the banks,” he said.
“It’s positive for everybody if you can get an innovative structure away at a reasonable cost. I would encourage others to support it. From an execution perspective it’s easy to do. FIIG’s got the process well under control and for us it was a fairly easy transaction to close.”
The opening of the bond market to unrated corporate issuers comes at a particularly opportune time because the situation with the banks is expected to become steadily more difficult.
The new Basel III regulations on capital adequacy that were drafted in the wake of the GFC but are only now being implemented require banks to hold more capital in reserve when they lend to unrated companies, so they will force banks to reduce exposure, lend for shorter periods or increase margins to cover the extra costs.
“The best time to get the issue of diversifying your funding on the table is in the ordinary course of business when things are calm and you’ve got a good story to tell,” Mr Paton said.
“When there is a crisis everybody goes looking for the solution but that is when you pay the most because it is always more difficult to access any funding source for the first time.
“Now is a good time to open up a new source of debt funding because capital markets are relatively stable and investors are hungry for yield and they are hungry for fixed income as an asset class.”
Mr Paton said that property companies that continued to rely solely on bank funding could potentially find themselves in a precarious position when markets went through their next crisis.
“Companies that ignore the bond markets are going to be left funding long term operations with very short term debt which is a dangerous mix,” Mr Paton said.
“However, before Australian mid-caps can diversify away from that, they first need to become aware that they can actually tap bond markets.
“In the past, unrated companies were locked out of the Australian bond market but that issue has been solved now and property company directors should be aware that the third pillar – the bond market – is open to all companies and not just those with a credit rating.”
So which property companies are likely to be attractive to bond investors?According to FIIG Director - Debt Capital Markets, James Vance, the market is most receptive to property companies who are not traditional build and sell developers but are developers or investors that also retain some property assets.
James Vance, FIIG Securities Director - Debt Capital Markets[/caption]While bonds are not secured against specific assets like bank loans, they rely for their security upon the overall asset backing of the company and a “negative pledge” which prevents the company from taking out excessive debt.
“Instead of getting expensive mezzanine money or having to get another equity partner you have a lower cost corporate bond which is essentially backed by all of the group’s assets including every development they’re doing and every investment asset they have,” Mr Vance said.
“We are only secured against the head stock, the holding company and potentially over the shares in the companies that own the property but we don't take security over property which has been taken by the bank so we rely on a negative pledge instead.
“A typical issue raises $25-$75 million, and current interest rates are 6-10 per cent, depending upon the credit risk of the issuer. You typically end up with over 400 new investors, which means ongoing disclosure to investors is required and based on business performance, will be receptive to providing additional funding as opportunities arise.”
According to Vance, once a borrower has decided to seriously consider the bond market for its funding requirements the process can be surprisingly quick with transactions only requiring six to eight weeks from start to finish.