Offerings from K-Reit and New World China show rights issues still have a place

As the global economic outlook has improved, investor sentiment towards equity issuance has seen a pickup as well and it has become easier for Asian companies to sell new shares at a reasonable discount. This means there is less need for rights issues, which were popular earlier in the year when a reluctance among investors left many companies with little choice but to tap existing shareholders for more capital.

In Hong Kong, top-up placements are now a regular feature -- although since mid-September they have admittedly had to fight for the attention of both bankers and investors as a multitude of initial public offerings have stolen the headlines -- and several Taiwanese companies have boosted their coffers by selling global depositary receipts to international investors in recent months. In India, the floor price restrictions are still making follow-ons a bit of a challenge, but companies are quick to use the market windows and dozens of Indian issuers are now lining up to sell new shares through qualified institutional placements.

However, a couple of sizeable rights issues launched in the past week show that this form of capital-raising still has its place, and one of them -- K-Reit Asia -- is raising the stakes by offering a much tighter discount than has been the rule among Asian rights offerings to date. If it comes off, this could change the view on what companies have to offer in order to get investors on board.

K-Reit, a Singapore-listed real estate investment trust focusing on commercial buildings, is aiming to raise S$620 million ($444 million) from a one-for-one rights offering at a price of S$0.93 per unit. The price is a 21.2% discount to the closing price just before the deal was announced on September 30 and an even tighter 11.8% discount versus the theoretical ex-rights price (Terp) of S$1.06. Early this year, rights offerings were routinely offered at a 30%-35% discount to Terp, although the most recent deals saw the discount creep down into the high-20s.

A source notes that the tighter discount will make it easier for K-Reit to use the funds for accretive acquisitions, which will be positive for existing shareholders. At the same time, though, it will make it more difficult to attract new unitholders. Rights issue are initially offered to existing shareholders, but in most deals the shareholders are able to sell their so called nil-paid rights in the open market if they don't want to subscribe to more shares -- allowing other investors a chance to buy shares at a discount, although their discount will typically be a lot smaller as they are also paying for the rights.

According to a K-Reit statement, about 80.8% of the gross proceeds will be used to repay borrowings, including a bridge loan taken up in connection with the acquisition of six strata floors of Prudential Tower in Singapore. Another 18.5% will be set aside for potential acquisitions, asset enhancement initiatives and working capital, while 0.7% will be needed to pay the fees and expenses related to the rights issue.

"The rights issue is part of our long-term strategy of growing K-Reit's portfolio through prudent financial management and maintaining an optimal capital structure," said Ng Hsueh Ling, the CEO of K-Reit's management company.

As a result of the deal, K-Reit's aggregate leverage is estimated to drop to 9.1% from 33%, which will improve the trust's implied funding capacity to S$647.8 million from S$438 million (based on an assumed maximum leverage of 30%-40%) and therefore its financing flexibility. Including the additional six floors at Prudential Tower, the portfolio is valued at S$2.1 billion ($1.5 billion).

The unit price fell 5.1% to S$1.12 the day after the announcement and has traded as low as S$1.10 since then, but it has not dropped below the Terp, which implies investors believe the deal will go through. Yesterday, the unit price again closed at S$1.12.

The other offering, by Hong Kong-listed New World China Land, is structured more along the lines of the rights issues seen in Asia already this year. The company, which is involved in property development and investment, including hotel operations in China, is seeking to raise at least HK$4.89 billion ($630 million) from a one-for-two offering, priced at HK$2.55 per share. That price translates into a 38.1% discount to the closing price last Thursday -- the day before the deal was announced -- and a 29.2% discount to the Terp. The deal size could increase to as much as $688 million if all of New World China's outstanding convertible bonds (other than those held by its parent company) are converted into shares and all its share options are exercised before the record date.

The company said in a statement that it will use the money to refinance its existing borrowings, including a possible redemption next year of its zero-coupon CB, which was issued in June 2007 and has Rmb2.55 billion ($375 million) still outstanding. The CB holders have the right to put the bonds back to the issuer in June 2010.

Having considered the benefits and costs of other fund-raising alternatives, including debt issuance and a share placement, the company said its directors view a rights issue as the "preferred means for the group to raise long-term funding without subjecting itself to interest burden or additional debt". The rights issue will also give existing shareholders an opportunity to avoid dilution, while the net proceeds will improve the company's capital base and financial resilience.

Like most of the other Asian rights issues this year, both New World China and K-Reit are relying on their controlling shareholders to pick up most of the shares, leaving a smaller part to be underwritten by the arranging banks. New World China's parent company, Hong Kong-listed New World Development, has committed to buy its full entitlement, or 69.09% of the share issue, and has also agreed not to convert any of its CBs before the record date. The remaining 30.1% of the deal will be jointly underwritten by BOC International and HSBC, which are helping to arrange the rights issue.

Meanwhile, Keppel Corporation and Keppel Land, which together own 75.8% of K-Reit, will take up their full entitlement in that deal. The remaining 24.2% will be underwritten by BNP Paribas, which is acting as lead manager.

Aside from reducing the risk for the underwriting bank, the fact that a large portion of the K-Reit deal will be bought by the controlling shareholders may also increase the willingness among other shareholders to accept the tight discount. The first indication of whether they will actually do so will come at an extraordinary general meeting scheduled for October 21, when existing unitholders will get to vote whether to go ahead with the rights issue or not. If they approve, the K-Reit units will start trading ex-rights on October 23 and the company will embark on a roadshow in the first week of November in an attempt to market its story to a wider audience.

When K-Reit listed in April 2006, it didn't sell any new units and when it raised $400 million through a rights issue in April last year, it led the deal itself, resulting in sparse marketing to non-existing unitholders. And since the rights issue comes only two months after Ng Hsueh Ling took over as CEO of the K-Reit management company, it is also a good excuse to re-introduce the management and its strategies to investors.

New World China doesn't need approval from its shareholders to go ahead with the deal. The record date has been set for October 23, the nil-paid rights can be traded between October 30 and November 6 and investors have until November 11 to subscribe for new shares.

Separately, another Singapore-listed Reit -- Fortune Reit -- said yesterday that its fully underwritten HK$2.09 billion ($270 million) one-for-one rights issue was 115.8% subscribed (including excess applications) by existing unitholders and investors who picked up nil-paid rights in the market. The trust, which has an existing portfolio of 11 retail malls that are all based in Hong Kong, was raising money at a 28.3% discount to Terp and said the majority of the proceeds from the rights issue will be used for the acquisition of three retail properties in Hong Kong, namely Metro Town, Caribbean Bazaar and Hampton Loft.

Fortune Reit's unit price traded well throughout the subscription period and on Friday ended at HK$2.76, which marks a 20.5% premium to the rights offer price of HK$2.29 per unit. The main sponsor, Cheung Kong (Holdings), took up its full entitlement of 25% and also bought additional shares that left it with 31.9% of the rights issue. The deal was arranged by DBS and Standard Chartered.