ESR Cayman prices SGD NC5 perp at 5.875% IPG

This article was published earlier today at Bondsupermart.com

This morning, ESR Cayman Ltd (“ESRCAY”) launched a new SGD perpetual bond at an initial price guidance (“IPG”) of 5.875%. This initial pricing represents a spread of ~495bps above the 5-year SGD swap offer rate (“SOR”). As with most conventional perps, the new ESRCAY perps are subordinated to its other senior financial liabilities. 

The new ESRCAY perps are first callable in March 2026. If not redeemed on its first call date, the coupon rate on the perps will reset to a rate of the sum of the prevailing 5-year SOR plus initial spread and a step-up margin of 200bps.

According to the bond documentations, ESRCAY expects to utilise the proceeds from this offering for potential acquisitions, investment opportunities and general working capital requirements. It may also utilise proceeds for debt refinancing.

About ESR Cayman Ltd

ESRCAY was formed as a result of a merger between e-Shang Cayman Limited (“e-Shang”) and Redwood Group Asia in 2016. The company is a logistics real estate developer and operator focused on building and managing logistics properties such as warehouses and distribution centres. The company also manages a broad range of funds and investment vehicles specializing in those assets.

Per ESRCAY, the company is one of the largest Asia Pacific-focused logistics real estate company by gross floor area (“GFA”). It has a large portfolio of assets, and development pipeline. The firm has business interests across China, Japan, South Korea, Singapore, Australia, and India. As at 30 Jun 20, the group had total assets under management (“AUM”) of USD26.5 billion, with a portfolio of 315 properties covering a total GFA of 18.7m square metres (including properties under construction and land held for future developments).

By geography, most of ESR’s AUM were held in Japan, China, and South Korea, which constituted 30%, 23%, and 27% of the group’s total AUM correspondingly. The company’s biggest geographical exposure in terms of revenue is Australia, China and Japan. These three countries contributed 21%, 31%, and 24% of its total revenue of USD197.6m in 1H20 respectively. 

e-Shang was co-founded by an affiliate of Warburg Pincus, Sun Dongping and Mr Jeffrey Shen Jinchu in 2011, while Redwood Group Asia was established by Mr Stuart Gibson and Mr Charles Alexander Portes in 2006. Today, Mr Shen and Mr Gibson continue to lead ESR’s senior management team as co-founders and executive directors.

Credit highlights

With COVID-19 accelerating e-commerce adoption as consumers shun physical stores, and being one of the leading e-commerce landlord in China, ESR Cayman’s business was largely unaffected in the first half of 2020. The group’s revenue climbed 26.9% YoY to USD 197.6m in 1H20, driven by strong growth in the Fund Management (+35.3% YoY to USD 83.6m) and Development (+46.6% YoY to USD 55.2m) segments.

In line with the growth in its top line, ESR Cayman’s reported EBITDA jumped 48% to USD 300m in 1H20. Excluding fair value gain on investment properties and share of profits of JVs/associates (mainly driven by appreciation of fair value of underlying assets), we calculated the group’s adjusted EBIT at USD 94.5m in 1H20, up by 12% from the year-ago period. Despite higher borrowings, ESR Cayman managed to materially reduce its borrowing costs, following the full redemption of convertible preference shares in November 2019. Finance costs fell 14.0% YoY to USD 71.7m in 1H20, which translated to an adjusted EBIT-to-finance costs ratio of 1.3x (1H19: 1.0x).

Besides having a relatively weak interest coverage ratio, we see insufficient cash-flow generation as a constraint on ESR Cayman’s credit profile. Net cash flows generated from operating activities improved to USD 26.2m (1H19: USD 14.4m). Adjusting for changes in working capital items and cash interest expense, we estimated the group’s funds from operations at negative USD 29.3m (1H19: -USD 27.9m).

Nevertheless, these metrics are likely to improve in our view, supported by the steady growth in ESR Cayman’s investment and fund management segments. With e-commerce assets representing 63% of ESR Cayman’s investment property portfolio, the group achieved 4.0% rental reversion on renewed leases in 1H20, and maintained a high portfolio occupancy of 91%.

Meanwhile, the fund management segment continued to display strong growth momentum, as total AUM and fund management fees grew 31% YoY and 35% YoY to USD 26.5 billion and USD 83.6m respectively. Lastly, the group’s liquidity was strong with USD 946.6m of cash and bank balances, representing 1.6x of near-term debt and lease liabilities.

Net gearing (net debt over equity) was ~64.0% at the end of June, rising from ~55.7% as at 2H19 in line with an increased debt load of USD2.9 billion (2H19: USD2.6 billion). Meanwhile, ESRCAY’s gross debt over total assets stood at ~42.9% in 1H20 (2H19: ~40.5%).

ESRCAY had a comfortable liquidity position with USD946.6m of cash and bank balances against short term bank borrowings of USD570.2m, representing 20% of its total debt load. We see an increased refinancing risk in maturities beyond 1 year with USD1.2 billion of debt (representing 44% of total debt) maturing in the second year from 30 Jun 20. Nonetheless, we continue to expect ESRCAY to demonstrate its ability to refinance these debt with a strong tangible asset base that mostly comprised of USD2.6 billion of investment properties and USD910.5m of investments in joint ventures (primarily property trusts).

Bond Pricing

The existing ESRCAY curve is made up of the S$350m ESRCAY 6.750% 01Feb2022 Corp (SGD), USD425m ESRCAY 7.875% 04Apr2022 Corp (USD) and S$225m ESRCAY 5.100% 26Feb2025 Corp (SGD). They were indicated at ask yield to maturity (“YTM”) of 2.92%, 4.02% and 4.08% respectively as at 16 Feb 20. On a post-swap basis, the ESRCAY 7.875% Apr’ 22s would yield around 4.17% to maturity in SGD terms.

We think the IPG of the new ESRCAY perps looks attractive. The new ESRCAY notes, if priced at 5.875%, will offer a spread of 495bps above the 5-year SGD SOR. The IPG also represents a yield pickup of 180bps over the ESRCAY 5.10% ’25s, which we think is an attractive compensation for the 1-year longer tenor assuming a first call. It also pays a decent spread for its subordinated ranking against its straight bonds.

The 5.875% IPG compares attractively against bonds of ESR’s peers, such as ARA Asset Management Limited (“ARA”)’s perpetual bonds outlaid in the table below. For instance, the real assets fund manager’s ARASP 5.60% perps that has a similar call date in 2026 are indicating at an ask YTW of 5.52%.

Table 1: Relative valuation

Issuer	Coupon rate (%)	First Call date	Ask Price	Yield to call (%)	Z-spread to call (ask; bps)	Issue size (S$m)
ARA Asset Management Ltd	5.20	19-Jul-22	101.04	4.44	411	300
ARA Asset Management Ltd	5.65	14-Mar-23	100.49	5.40	508	300
ARA Asset Management Ltd	5.60	04-Sep-26	100.38	5.52	485	350
Source: Bloomberg Finance L.P., iFAST compilations, pricing data are indicative only as at 23 Feb 21

ARA is a global real assets fund manager with gross assets of S$119 billion as at 31 Dec 20. It operates with a similar business model as ESRCAY and also has most of its portfolio assets in the APAC region. A major difference between ARA and ESRCAY is that the former’s portfolio of assets comprises mainly of office and commercial properties. We estimated that the company’s adjusted net gearing ratio (including perpetual securities as debt) was 0.97x as of 30 Jun 20.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a principal position in ARASP 5.200% Perpetual Corp (SGD), ESRCAY 6.750% 01Feb2022 Corp (SGD) and ESRCAY 7.875% 04Apr2022 Corp (USD). The analyst who produced this report hold a NIL position in the abovementioned securities.

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