Listed property trusts promise more griefFont Size: Decrease Increase Print Page: Print Adele Ferguson | March 18, 2009 Article from: The Australian FASTEN your seatbelts: the bombed-out listed property trust (LPT) sector is about to put investors through more agony.
Some LPTs are believed to be investigating ways to spin off their overseas assets, while the banks look at the impact of removing a poison pill embedded in the LPT's debt facilities.
It is understood some LPTs have breached or are dangerously close to breaching their loan covenants, and their banks are looking at options to minimise their exposure.
These include splitting the listed stock into two separate operations: a good company housing all the Australian assets and debt, and a bad company housing the troublesome overseas assets and the associated debt.
If the loans were not cross-guaranteed, or were non-recourse, it wouldn't be too difficult.
It would certainly appeal to the many investors in LPTs, who have watched more than 90 per cent of the value wiped off the share prices in the past 18 months.
Some of the banks are also understood to be looking at ways to consolidate their loan exposure in the LPT sector by encouraging some LPTs to merge.
Another option is expensive listed hybrid equity issues, which offer a better return than standard debt, are safer than equity, relate to specific assets, and are cumulative. If they can't make profits or pay interest in that year, it accumulates and is repaid the following year. And to avoid liquidity issues, they are listed on the ASX.
Until now, the banks had the comfort of knowing the LPTs could go to the market and raise equity, but the appetite of investors is rapidly drying up, particularly in the LPT sector, which raised more than $8 billion in the past six months, most of which is under water.
The banks, quite rightly, want to protect their money, because a great deal of the lending is unsecured. With fresh equity raisings no longer an option, banks are slowly starting to realise they will have to ease up on the control provision clause and will use it as leverage to dictate which LPT will merge with another LPT.
As UBS analyst John Freedman said in a report yesterday: "To date, debt providers have sat back and encouraged equity holders to strengthen balance sheets.
"However, in our view, banks will eventually be forced to be more proactive in determining which groups to back and facilitating the renegotiation of covenants/restructuring of debt to allow these groups sufficient headroom to get through the credit crisis. A natural part of this will be the banks' eventual moves to encourage consolidation (taking concentration levels up but minimising the next phase -- defaults by weaker players).
"Logically, the survivors will be those with the strongest balance sheets and least complicated financial structures. We call these the Independents, as we expect they will have some degree of control over their own destiny and, importantly, will continue to be able to roll debt (albeit with considerable effort). These include Westfield, CFS Retail Property, Dexus, Stockland Group, Mirvac Group, Commonwealth Property Office Fund and Bunnings Warehouse Property," he said.
Freedman sees captive players as potentially including GPT, Goodman Group, Macquarie DDR Trust, Macquarie Countrywide, Macquarie Office Trust, ING Industrial Fund and Tishman Spyer Office Fund. He doesn't rule out others in either camp.
The problem for many of the 19 LPTs is they have assets sitting on loan to value ratios of 80 per cent. Some property assets have LVRs above 90 per cent and will struggle to service their loans in the next six months.
In the case of ING Industrial Fund (IIF), its covenant gearing of 59.8 per cent is close to breaching the 60 per cent limit.
This limit falls to 55 per cent in June. Not surprisingly, IIF is actively negotiating with its banks to increase this limit and will update the market with any progress. ING Office Fund is in a similar situation. Its covenant gearing is a little over 42 per cent versus a limit of 50 per cent, with management estimating a breach would occur if cap rates softened by 100 basis points, and there was a 15 per cent decline in the Australian dollar versus the US dollar and the euro.
This doesn't leave much protection, given the volatile state of the financial markets.
Then there is GPT Group, which faces ongoing uncertainty regarding asset values, particularly in the joint venture fund with Babcock & Brown.
According to Goldman Sachs JBWere in a recent report: "Gearing levels are fluid and covenant limits will remain a focus until the asset divestment program is fully played out."
It also pointed out that there has been no meaningful progress on non-core asset sales, or a wind-up of the joint venture and no announcement on a new chief executive or chairman.
The list of woes goes on and on. Yet there has been a dearth of mergers due to an poison pill in the debt facilities of most of the LPTs, which has stopped at least five full-blown takeovers in the sector taking place.
However, as pressure mounts on the banks to clean up their exposure to LPTs, some are considering waiving the change of control provision buried in their debt covenants, which causes the debt facilities to become immediately due and payable on a change of ownership. The change of control clause means that not only does a potential buyer have to deal with the equity holders -- offering a premium to win control -- but has the added complexity of having to refinance all the debt in one hit rather than when the facilities mature.
The change of control provisions are understood to have stopped at least two big companies launching a takeover offer for GPT in recent months.
However, some of the mergers might be tricky, given the recent bout of cornerstone investments popping up in some LPTs, involving sovereign wealth funds or other LPTs buying blocking stakes in any potential merger and acquisition activity.
In the past few months, the Singapore Government's GIC has appeared on the Mirvac register with a 6 per cent stake, and on the GPT register with more than 10 per cent in the company.
The LPTs have caused untold problems for superannuation funds in the past couple of years, given most allocate up to 10 per cent of their asset allocation to LPTs.
With share prices diving to 1990s levels, their performance has been devastating.
As many get close to breaching their loan covenants, the next stage of the unravelling will determine those that lose and those that win. But given most of it is being driven by debt issues, it will be the banks dictating the next step.
GMG Price at posting:
35.4¢ Sentiment: Hold Disclosure: Held
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