Receive first-hand news on the latest bond issues, credit updates and special events when you join us on our Telegram channel at https://t.me/bondsupermart!
On 3 November, shareholders of ESR Cayman Ltd (“ESR”) will vote to approve the acquisition of ARA Asset Management Limited (“ARA”). Concurrently, ARA is holding a Consent Solicitation Exercise (“CSE”) to approve changes to the conditions of the change of control event for their perpetual bonds.
The two perpetual bonds in
question are the ARASP 5.600% Perpetual Corp (SGD) (Series
004) and ARASP 5.650% Perpetual Corp (SGD) (Series 002). The first change is
the replacement of the benchmark rate, which will most likely be the SORA-OIS
rate. This change is trivial and we will focus more on the second one.
Figure 1: SGD SOR curve is slightly higher than SORA-OIS curve
Source: Bloomberg Finance L.P., iFAST compilations
Data as of 29 October 2021.
For the second change, ARA will amend Condition 5(f) – the conditions for redemption upon a change of control. The change is as shown:
“(i) “Change of Control Event” means:
(1) Mr Lim Hwee Chiang John, The Straits Trading Company Limited, Cheung Kong Property Limited, Warburg Pincus LLP and/or
AVIC TrustESR Cayman Limited, cease to own (whether singly or otherwise) 30 per cent. in aggregate, direct or indirect shareholding interest in the Issuer…”
This effectively circumvents the step-up of 300 basis points (“bps”) upon a change of control, and thus, the perps are likely not to be called. However, there will be no changes for the ARASP 5.200% Perpetual Corp (SGD) which is callable in 19 Jul 2022. If the acquisition of ARA goes through, this ARASP 5.2% perp is almost certain to be called.
Should bondholders consent?
Currently, the two perps are trading extremely close to par and there are very few SGD perps out there that offer a yield-to-call (“YTC”) upwards of 5%. Adding the consent fees, investors’ total return from holding these bonds will slightly increase too.
Figure 1: Other SGD perpetual bonds
We examine ARA’s credit ratios, the pro-forma numbers of ESR post-acquisition and other companies to help us come to a better decision.
Table 1: Credit ratios of other issuers
|
ARA |
ESR |
FPL |
AAREIT* |
|
|
Total debt/asset |
30.2% |
30.5% |
- |
28.2% |
|
Net debt/equity |
22.9% |
34.1% |
80.8% |
33.4% |
|
Net debt/equity (treating perp as debt) |
80.8% |
48.2% |
94.5% |
83.8% |
|
Interest coverage ratio (X) |
21.8 |
5.8 |
4 |
4.5 |
|
Interest coverage ratio (incl. perp) (X) |
8.0 |
5.3 |
- |
- |
Source: Companies’ announcements, iFAST estimates
Data as of 30 June 2021. *AAREIT data as of 30 September
2021.
Using the pro-forma numbers, ESR appears to be in good credit health on a general basis. Here, interest coverage ratio is the trailing 12-month EBITDA/interest expense. However, for ARA and ESR they are based on past six-month numbers.
If bondholders were to vote no and the acquisition goes through, the two perps are supposed to have a step-up margin of 300bps if not called. However, it is unlikely this will happen. Instead, ESR is likely to call the two perps and probably issue new perps for refinancing. The new group will have 1.37b in cash, more than enough to call the three ARA worth about SGD 950m. Then, they will issue new perps where fees will be paid to investment banks instead of consent fees being paid to you, the investors.
We can use the ESRCAY 5.650% Perpetual Corp (SGD) to estimate the coupon rates of the new perps. The perp has an I-spread of 384bps as of 28 October 2021 where the I-spread is the spread between the bond and the interpolated yield from the SGD Swap Offer Rate (“SOR”) curve. As its next call date is in 4.35 years, if we assume ESR issues a new perp callable in 5-years and a 5-year SGD SOR of 1.515%, its coupon rate is likely going to be about 5.3-5.6%, similar to the current YTCs of the two ARA perps. It may even be lower as the acquisition of ARA adds to their earnings and still keeps the gearing ratios at acceptable levels.
Furthermore, if the perps were to be called, alternatives include perps issued by AAREIT, FPLSP, Credit Suisse, Olam International and Societe Generale. We have recent articles on these issuers but their yields fall short to that of ARA’s perps. ARA’s credit ratios are also acceptable and for the yields the perps are giving, they are still worthy of remaining in your portfolio.
So, do vote yes before 5pm on 9 Nov 2021 to collect your early consent fee of 0.4% if you are holding the two perpetual bonds.
Figure 3: Timeline of the CSE
Source: iFAST Financial
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ARASP 5.200% Perpetual Corp (SGD) and ESRCAY 5.650% Perpetual Corp (SGD) and the analyst who produced this report holds a NIL position in the abovementioned securities.
Our podcast series, Yield Hunters, is available on Spotify, iTunes Podcasts and Google Podcasts. We share our thoughts on new bond issues and hold discussions on the fixed income space. Listen to our latest episode below and follow us!
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.
Please note that only certain bond(s) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to Fundsupermart.com's prevailing policies and procedures. Please read our full disclaimers in the website.