Westfield-owner Scentre’s move to issue $3 billion in subordinated notes could herald a resurgence for hybrid debt structures in Australia as the nation’s biggest companies look to shore up balance sheets to weather the COVID-19 storm without diluting their shareholders.
Scentre shares rose 3 per cent to $2.34 on Thursday as shareholders breathed a sigh of relief that the company did not follow through with a widely speculated equity raising. Shares closed at $2.32.
Barry Sharkey, managing director at UBS, which worked with Scentre on the deal said the transaction was a good example of innovative thinking when it comes to capital management strategy – looking beyond traditional debt and equity structures.
“Whilst every case is different, we would expect this form of capital will be considered by other companies in the future – especially noting the ongoing investor demand for higher yielding securities in the current environment,” Mr Sharkey said.
Investors said the deal gives Scentre balance sheet flexiblity as it navigates through the disruption to its rent collection, battles with tenants, flat sales and the drop in the value of its malls.
Scentre reported a $3.6 billion interim loss which was driven by a reduction of $4 billion in value across its malls.
Westfield malls’ owner said the cash would be used to shore up the balance sheet, repay shorter-term debt facilities and provide cash for longer-term security as it battles the impact on its business from the global pandemic.
The owner of the overseas-based Westfield malls, Unibail-Rodamco-Westfield, on Wednesday announced it was also undertaking a ???9 billion ($14.5 billion) balance sheet restoration package which comprised a fully underwritten rights issue and more asset sales.
Grant Berry, head of real estate for fund manager SG Hiscock, said dilutive equity raisings in the midst of the global pandemic could be destructive to shareholder value.
“The Scentre deal is innovative and good for security holders as it puts the business in a better position to restore value and allows the group to come through COVID without having to use the traditional dilutive equity raisings,” Mr Berry said.
Scentre will now have sufficient long-term liquidity to cover all debt maturities to early 2024.
Kelly Amato, director of ratings agency Fitch Australia, said the Scentre issue was credit positive and would help shore up the group’s balance sheet.
“This will give Scentre the balance sheet flexibility to see out the pandemic and not be under any other pressure to take on further debt or make a dilutive capital raising,” Ms Amato said.
The notes were issued in two tranches with the six-year subordinated notes at a rate of 4.75 per cent and the 10-year notes were done at a 5.125 per cent rate.
Amy Phan, fund manager at Pengana Capital, said the debt was expensive at about 200 basis points over current bonds but was a better move for the company than issuing dilutive equity or selling assets.
“Unlike the office sector where there is a disconnect between listed and direct markets with private capital acquiring assets at book value, we haven’t seen that in large retail assets. This [debt] issue eliminates some concerns for investors – whether Scentre’s balance sheet could withstand material further devaluations like its global peers,” Ms Phan said.
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