Mapletree Logistics Trust

(08-03-2012, 12:02 PM)Drizzt Wrote: but how low can MLT reduce? if i am not wrong their cost of debts is pretty low already. like 2.6%

You are right. It's 2.3% with average duration 4.4 years (Pg 13).

Very likely they have to offer at least 4%-6% if the recent Perps issues serve as a guide. In that case, I see Perps possibly becoming a preferred means of fund raising, replacing Rights Issues / Private Placements rather than Debts / Bonds. After issuing Perps, Aggregate Leverage gets reduced and they can also take on more debts.

though perpetual securities are considered as equity to reduce gearing/leverage. but it does impact certain other ratio. e.g. interest cover, perpetual securities yield/coupon will contribute to the interest expense calculation. certain banks or rating agencies will consider both gearing/leverage and interest cover..

(08-03-2012, 11:19 AM)freedom Wrote: it is perpetual, means it is kinda equity; but if it is callable, it exhibit certain feature of bond.

basically it is a hybrid between equity and bond.

I understand the perpetual part. But a creditor is a creditor; and an IOU is an IOU, no?

If I were to put it in simple lay man English, maybe it will sound like this:

We MLT would like to borrow some money from you; but we do not have the intention to pay you back the principal. We will be paying you the interest of x% in exchange of you holding this IOU. To solve the problem of not being able to get back your pricipal in a mutually agreed future date, we have kindly arranged with our bankers to create a market where this IOU that you hold can be sold. Bear in mind that the price that you will get for your IOU is subject to market forces such as interest rate movement.

Interestingly, since we are not liable to pay you back the principal, our accountants have agreed that we can record this amount that we borrow from you not as liability but as equity meaning that you have become our shareholder - but without the voting right.

So the IOU that you hold makes you neither a creditor nor a shareholder but somewhere in between so we call this IOU "security".

it is not really an IOU, because the holder can only claim coupon, not the principal. So what does MLT really owe you? a promise to pay you coupon only.

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anyway, perpetual still holds its position in capital market. e.g. Olam perpetual security. If one investor is interested in investment in Olam for long term, but does not like the volatility in its share price at the moment. The investor might choose to invest into its perpetual security and wait for a moment to "convert" its perpetual security into its common equity for further upside(super if the security is convertible at the holder's option; if not, sell the perpetual in the secondary market and buy the share).

of course, there is a huge difference between having a secondary market and having an efficient secondary market. I doubt that there is an efficient secondary market for any perpetual securities listed in SGX.

(08-03-2012, 01:01 PM)egghead Wrote: but we do not have the intention to pay you back the principal.

You missed out something very important in your IOU note. The above ought to be replaced with,

"We reserve the rights to redeem the IOU at any time, after z no. of years."

That's to protect you from continuing to pay "exhorbitant" rates should interest rate drop even further (which may be triggered by huge demand for such IOUs).

From Business Times,

S$ perpetual bond sales at record high

Mapletree Logistics Trust began marketing a sale of perpetual notes to yield in the mid-5 per cent range, a person familiar with the matter said yesterday, asking not to be identified because the details are private.

Corporates have sold about $2.7 billion of the bonds since December, more than any other year, according to data compiled by Bloomberg which stretches back to 1999.

Falling yields and low benchmark rates are pushing investors seeking higher returns to riskier and longer-maturity assets. Yields on Singapore sovereign debt have dropped 54 basis points since the beginning of July, and the six-month swap offer rate averaged 0.304 per cent over the last 12 months, 20 basis points lower than the previous 12 months.

'We've been in a low interest environment for quite some time, and investors have started to look for higher-yielding alternatives,' Clifford Lee, head of fixed income at DBS Group Holdings Ltd, said yesterday. 'This can be achieved by buying bonds from lower-rated companies or by buying notes with longer tenors.'

DBS is helping to arrange Mapletree's sale, the fifth of such notes denominated in Singapore dollars this year.

Perpetual securities accounted for 34 per cent of all Singapore dollar-denominated bonds sold this year, versus 7.7 per cent in 2011, according to data compiled by Bloomberg. Singapore dollar bond sales more than doubled to $7.8 billion this year compared with $3.7 billion in the same period of 2011.

The notes pay more than securities with a set maturity to compensate investors for the risk that they won't be called. They are generally senior to equity and subordinated to other types of debt, and may contain terms stipulating that coupons must be paid if a dividend has been declared. Issuers typically retain the right to call the bonds after a set period.

Genting Singapore Plc, which operates one of the country's two casino resorts, sold the largest Singapore dollar perpetual bond on record when it issued $1.8 billion of 5.125 per cent notes on March 1.

Singapore Post and Olam International, the commodity supplier partly owned by Temasek Holdings, raised $625 million selling perpetual securities last month while Global Logistics Properties increased its 5.5 per cent of existing notes by $250 million in January.

Hyflux Ltd, the country's biggest provider of water treatment services, became the first company in Singapore to sell perpetual bonds when it issued notes in April last year, bringing the total for 2011 to $1.63 billion.

Singapore Post's $350 million perpetual bond pays 4.25 per cent until its first call date in March 2022, more than a 10-year bond it sold in March 2010 which has a 3.5 per cent coupon.

'With high levels of liquidity among private bank investors across Asia and robust conditions in global credit markets, this is a good time to look at perpetuals,' HSBC Holdings Plc's Singapore-based managing director for Asia-Pacific debt capital markets, Alexi Chan, said.

'For many companies, issuing a hybrid instrument can also bring significant benefits to their capital structure.' - Bloomberg

RE: Mapletree Logistics Trust
FROM: OCBC (Extract)
MLT – OCBC

STRENGTHENING ITS POSITION
•Proposed perpetual securities issuance
•Expecting improved gearing level
•Continued disciplined approach towards Investments

Proposed issuance of perpetual securities

Mapletree Logistics Trust (MLT) announced earlier this week that it is considering the issuance of SGD-denominated perpetual securities. We view the initiative positively as it provides the much-needed ammunition for its acquisition plans. As the perpetual securities are expected to be fully accounted as equity, the issuance also has the effect of paring down MLT’s aggregate leverage. Based on our conversations during an investor presentation held on 6 Mar, we estimate that the aggregate principal amount may fall in the range of S$300-500m, with a five-percent handle for its distribution rate. Together with an expected positive revaluation of its properties in the coming Mar quarter, we believe its leverage may be brought down from 41.4% as at 31 Dec 2011 to a more comfortable 36.5-38.5% level.

I think perps are well suited for reits since the latter can afford to pay interest to its lenders but it doesn't seem able to ever repay its loans due to the 90 - 100% payout rule. Refinancing may not always be possible in the long run. Perpetual securities comes in handy as it provides good source of funding, the reits can repay interest and it doesnt need to ever repay the principal. This matches their operating model well. I guess more and more reits will look into such funding in the future.

Issued S$350Mil @ 5.375%.

See SGX Annc + Press Release

Hopefully the increased headroom in debt/equity will allow MLT to more than cover back the increased interest costs.

Given the historical low interest rate now, where the only way for interest rates to go is up, I wonder how much margin is there for those who subscribe for this perpetual.