Great Portland Estates (GPE) has this afternoon closed a four-times oversubscribed £150m five-year senior, unsecured convertible bond paying an annual coupon of just 1.0%, securing the lowest-ever coupon in UK convertible bond market history.
Bondholders in the sterling-denominated new issuance are entitled to convert into GPE ordinary shares, at any time prior to the 10 September 2018 maturity, at a 35% premium to the weighted average share price immediately at launch, at 529p, which equates to 714.15p.
The conversion premium secured is also a 54% increase on GPE’s last reported EPRA net asset value (NAV) share price, which at 30 June was 464p.
This two-part buffer – the 14% share price premium to NAV at which GPE was trading before this launch plus the 35% conversion premium to that same share price – reflects a “double cushion” against equity dilution for existing shareholders.
Against its guidance range issued this morning at the launch of the convertible bond offering, GPE secured the best in both instances: a fixed rate coupon at the low end and a share price conversion premium at the high end.
All of which explains why listed property companies tend to favour issuing convertible bonds when their share price is at a premium to NAV, the net difference between assets and liabilities, or in case of the quoted real estate sector, property portfolio value minus total debt plus swap liabilities.
Bondholders are only motivated to convert their bonds into equity when the share price rises above the agreed premium threshold, which in this case, is 714.15p.
Prior to this point, GPE benefits from an all-in cost of debt of 100 basis points.
And in this interest rate environment, 100 bps is vastly superior to even the 12-month downward pressure on bilateral senior, unsecured loan margins, or other form of capital markets debt – such as a private placement bond or a securitised loan – and even a straight company-guaranteed corporate bond.
The £150m convertible was four times oversubscribed at the 1.0% coupon level, in other words, the real estate investment trust (REIT) could have raised as much as £600m today at an annual coupon of just 1%, which will be paid bi-annually.
Nick Sanderson, finance director of GPE, said: “We are very pleased with the appetite investors have shown for this convertible bond which was significantly oversubscribed and provides GPE with attractive financing at a low fixed coupon that should further enhance returns for shareholders from our exciting development programme.
“Our strong track record in accessing funding on competitive terms from a range of sources reflects our focused business strategy, prime central London property portfolio and conservative capital structure.”
Settlement is expected to take place on or about 10 September.
Back in mid-July, Derwent London – which issued the first post-global financial crisis new issuance UK convertible bond market after a four-year hiatus in May 2011 – issued a six-year £150m convertible bond with a bi-annually paid coupon totalling 1.125% and a 35% conversion premium.
In addition to the 35% premium to share price which Derwent secured on the day of issuance, on 17 July, the central London-focused REIT was also trading at 30.4% premium to its most recently stated NAV, albeit this in part related back to the end of 2012.
In total, Derwent’s convertible bond – which was more than nine times oversubscribed – held a 65.4% cushion, based on the pricing at the time the convertible’s launch. In the secondary markets, Derwent’s bond is trading at approximately 3% above issuance price.
GPE said this morning that the net proceeds will be used to retrospectively finance July’s acquisition of the 79,000 sq ft Oxford House, at 76 Oxford Street, which was acquired from Land Securities for £90m, in a two-part transaction which also included the £1.5m purchase of neighbouring 73/89 Oxford Street for ‘rights of lights’ and ‘rights of way’ arrangements.
GPE said £60m of the proceeds of the convertible bond will retrospectively finance Oxford House, with the balance to help fund its near term development programme, which includes four schemes across 580,000 sq ft, which are 57% pre-let and have £79.8m in remaining capital expenditure.
Further down the track, GPE have five schemes, covering 659,900 sq ft of letable space, including its proposed 414,100 sq ft mixed-use development at Rathbone Place, with potential starts in the next 24 months with estimate capital expenditure of around £338m.
Taken together, GPE’s total potential development programme extends to 2.4m sq ft, spread over the next decade.
For GPE’s convertible bond, JP Morgan Securities and The Royal Bank of Scotland were joint global co-ordinators and joint bookrunners, along with Credit Suisse Securities (Europe) and HSBC Bank as joint bookrunners.
Banco Santander and Crédit Agricole Corporate and Investment Bank joined as co-managers.
Lazard acted as GPE’s financial adviser.