Frasers Property launches 7Y SGD sustainability bonds at 3.25% IPG

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This article was first published on Bondsupermart.com on 16 Sep 2021.

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As the FPLSP 3.950% 07Oct2021 Corp (SGD) is maturing in a few weeks, Frasers Property Limited (“FPL”) is making full use of low interest rates to launch their senior sustainability bonds. However, these bonds have an initial price guidance (“IPG”) associated with lower credit spreads, which may not be what investors want.

About the bonds

The senior unsecured bonds are issued by Frasers Property AHL Limited, a wholly owned subsidiary of FPL and guaranteed by FPL. It is launched from the AUD 2b Multicurrency Debt Issuance Programme dated 6 February 2020. The bond matures in 7 years and also has the make whole call feature, similar to other FPL bonds.

The net proceeds arising from the new issue will be used for the financing or refinancing of new or existing qualifying assets and projects as described under the Eligibility Criteria for Eligible Green or Sustainable Projects in the FPA Sustainable Finance Framework. One example is expenses for green buildings – buildings that have achieved a minimum 4-Star GRESB (Global Real Estate Sustainability Benchmark) rating from the latest available GRESB Benchmark Report and GRESB Standing Investments report.

About Frasers Property Limited

Most Singaporeans should have heard of FPL as they have three real estate investment trusts (“REITs”) listed on the SGX-ST. They are the Frasers Centrepoint Trust, Frasers Logistics & Commercial Trust and Frasers Hospitality Trust. FPL also has four strategic business units comprising Singapore, Australia, Hospitality and Industrial & Logistics; as well as Thailand & Vietnam and Others.

Figure 1: Organisational structure of Frasers Property

Source: Frasers Property Limited. As of 31 March 2021.

TCC Assets Limited (“TCCA”) owns 58.25% of FPL and Thai Beverage Public Company Limited (“ThaiBev”) owns 28.86% as at 14 May 2021. Charoen Sirivadhanabhakdi is the non-executive and non-independent chairman of FPL and is also the founder of ThaiBev while Panote Sirivadhanabhakdi is the Group Chief Executive Officer.

1H21 Operating results ending March 21

In the half-year period ended 31 March 2021 (“1HFY21”), FPL seemed to perform decently with adjusted profit before interest and tax (“PBIT”) increasing by 6% YoY to SGD 837m. However, this was due to the Group’s strategic initiatives to grow its industrial and logistics asset base, thus transferring a portfolio of industrial properties in Australia and Europe from properties held for sale to investment properties. This resulted in a gain on the change in use, increasing adjusted PBIT by SGD 358m. Excluding for this, PBIT would have decreased by 39% YoY to SGD 479m.

Generally, revenue fell due to COVID-19 restrictions, hitting the hospitality segment especially hard. FPL’s hospitality segment made a PBIT of -SGD 38.0m compared to SGD 42.2m in 1H20. Recurring income fell by 14.4% to SGD 427m. Lower or absence of contributions also led to lower PBIT for business segments such as Singapore, Australia, Thailand & Vietnam and Others.

However, the business outlook for FPL should become more optimistic as the world gets increasingly vaccinated and travel agreements are being established, boosting the hospitality segment. In Singapore, FPL launched Parc Greenwich on 11 September 2021 and sold 65% of its total units, making it the best-selling Executive Condominium year-to-date. The group also has pre-sold revenue of SGD 1.8b (as of 30 June 2021) across its business units and has SGD 4.9b of properties held for sale (31 March 2021). The hot property market environment should also support its revenues, provided they have properties launching soon.

Credit profile

The Group improved its liquidity following its SGD 1.16b rights issue completed in April 2021 where TCCA and ThaiBev subscribed for 940m rights shares at the issue price of SGD 1.18. The Group also disposed properties amounting to SGD 262m during 1HFY21.

Comparing its financial position as at 30 June 2021 and that as of 30 September 2020, net debt decreased by SGD 1.51b while net debt/total equity improved by 24.2 percentage points (“ppt”) to 80.8%. Average cost of debt on portfolio basis also decreased by 1 ppt to 2.2% p.a. The group is also exploring sustainability-linked bonds which can potentially lower their borrowing costs further.

FPL also has a well-staggered debt maturity profile as shown in Figure 1. The new issue will presumably be used to refinance the outstanding SGD 200m FPLSP 3.950% 07Oct2021 Corp (SGD). Its low cost of borrowing also suggests an inherent strong credit profile which will allow the group to easily refinance its bonds.

From March to June 2021, the group paid down ~SGD 381.7m of debt while increasing its cash balances by SGD 1.2b to SGD 3.6b as of 30 June 2021. Thus, the group has the flexibility to either redeem its debt or refinance them given their healthy cash balances and lower gearing ratios.

Figure 2: Debt maturity profile of Frasers Property excluding REITs

Relative valuation

We compare Frasers Property to other property conglomerates such as Guocoland Limited, Capitaland Limited, ESR Cayman Ltd and OUE Limited. While their credit ratios are quite similar, FPL is second in terms of total assets at SGD 39.2b, with Capitaland the highest at SGD 84.4b. Their bigger asset size is probably a factor for their lower credit spreads too.

Table 1: Credit ratios of real estate companies  

As of 30 June 2021	Net debt/ equity (%)	1H21 Adjusted EBIT/ interest expense (x)
FPL	80.8	4.0
Guocoland	80.6	3.5
Capitaland	64.1	4.1
ESR Cayman	62.3	2.7
OUE	40.6	2.0

Source: Bloomberg Finance L.P. estimates, companies’ 1H21 financial statements, iFAST compilations

Below, we use their bonds to analyse the new issue by FAHL.

Figure 3: Relative valuation of comparable notes using YTM

Figure 4: Relative valuation of comparable notes using I-spreads

Looking at the yield curve of Capitaland and Frasers Property, the IPG from FAHL seems to be well priced at 3.25% and will be fair even if the final price guidance (“FPG”) were to be at 3.00%. However, at this current juncture of the business cycle and interest rates cycle, investors should consider other bonds due to the higher duration risk from the new issue.

ESR Cayman is in the midst of acquiring ARA Asset Management Ltd. which will improve its future earnings. Furthermore, the acquisition is mainly built on issuance of ESR shares, thus not affecting bondholders that much. In our opinion, the ESRCAY 5.100% 26Feb2025 Corp (SGD) looks like a more attractive option when compared to the FAHL new issue.

(Related article: ESR Cayman set to become APAC’s leading real estate manager)

OUE also recently launched a new tranche of 5-year bonds at a coupon rate of 3.50%. Although its credit risk is slightly higher, the bonds offer lower duration risk with slightly higher yields. The group has also improved its credit ratios and has SGD 4.5b of investment properties to divest if the low possibility of not redeeming its debt ever comes true.

(Related article: OUE Limited offers new 5-year SGD bonds at 3.70% IPG)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ESRCAY 6.750% 01Feb2022 Corp (SGD), OUECT 3.950% 02Jun2026 Corp (SGD) and OUESP 3.750% 17Apr2022 Corp (SGD) and the analyst who produced this report holds a NIL position in the abovementioned securities.

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