| Global converts by sector 2007 to date | |||
| Pos. | Issuer sector | Deal value (€mln) | No. |
| 1 | Real estate/property | 7,363 | 20 |
| 2 | Finance | 3,610 | 11 |
| 3 | Computers and electronics | 3,078 | 22 |
| 4 | Healthcare | 2,117 | 14 |
| 5 | Consumer products | 1,488 | 7 |
| 6 | Auto/truck | 968 | 4 |
| 7 | Food and beverage | 880 | 1 |
| 8 | Telecommunications | 773 | 1 |
| 9 | Oil and gas | 715 | 8 |
| 10 | Retail | 304 | 2 |
| 11 | Utility and energy | 289 | 1 |
| 12 | Chemicals | 189 | 3 |
| 13 | Aerospace | 180 | 1 |
| 14 | Mining | 164 | 3 |
| 15 | Textile | 163 | 4 |
| 16 | Transportation | 115 | 1 |
| 17 | Construction/building | 89 | 2 |
| 18 | Metal and steel | 76 | 1 |
| 19 | Machinery | 12 | 1 |
| 20 | Professional services | 6 | 1 |
| Total | 22,579 | 108 | |
| Source: Dealogic | |||
Property companies, once shut out of the convertibles market, are now a booming source of new issuance, accounting for about half the volume of deals in the EMEA region so far this year. In the past two months, more real estate companies have come to the market than in the past two years put together.
Companies such as Immofinanz, which came to the market in January 2007 hoping to raise just €600 million, ended up walking away with €750 million, after being greeted with a warmer than expected welcome. The Austrian company’s seven-year, non-call five issue was the largest ever by an EMEA property company. In February, Germany’s largest real estate company, IVG, launched a €400 million convertible, and Italian property company Risonameto also tapped the market.
“Historically, real estate companies were almost excluded from the equity-linked market because they were less volatile and paid dividends, which reduced the potential option value,” says Franck Cazaubieilh, head of equity-linked origination in Europe at BNP Paribas. “But a series of factors have given these companies access to the market. The equity story for the sector has been shining, which has made the companies very interesting to outright investors. At the same time, although volatility in the real estate sector has remained stable, there has been a widespread decrease in volatility across the board in European blue chips. This combination has made the property sector much more acceptable to equity-linked investors, whether they be hedge funds or unhedged outright investors interested in the fundamental equity story.”
In the past, most property companies seeking to expand their portfolios had to raise capital at the asset level, selling some of their existing portfolios to fund expansion. As property prices have risen however, this method of funding has become less attractive.
“All real estate companies in Europe are confronted with a drop in yield on acquisitions,” says Cazaubieilh. “As these companies’ stock prices have risen so too has the value of the properties they want to buy, reducing the yield. This has made the need for lower-cost financing all the more pressing. The subsidized cost of debt offered by convertibles allows them to keep their investments attractive.”
Because many property companies, including Immofinanz, are not rated, raising debt finance is often difficult and expensive. Equity financing has been the main alternative.
“A couple of years ago, when property companies had their shares trading below net asset value, equity financing of any kind was never an ideal solution,” says Viswas Raghavan, head of equity and debt capital markets at JPMorgan. “Now, not only are their shares trading at a premium to NAV, but they can issue more at a premium to their already attractive current share price. For property companies today the equity-linked option has really become a no-brainer.”
Share price preservation
Property companies issuing convertibles have also largely avoided the significant share price depreciation that has traditionally plagued many issuers in the market.
“Share prices in recent equity-linked transactions have been much better preserved than in the past,” says Raghavan at JPMorgan. “Typically, share prices would fall 3% to 5% when an equity-linked deal was launched because of hedging activity and an element of switching between income buyers and yield investors. When there is a strong underlying equity story, however, the more hedged you are, the more you crimp on your returns, so there is less hedging and more interest from those taking a directional view and wanting to own the instruments on an outright basis. Real estate stocks are often illiquid so these deals are also seen by many as buying opportunities and the impact on share prices has been between 0% and 2%.”
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Euromoney Liquid real estate March 2007: Full contents
