Grey shoes shuffle in at Paramount

Posted On Monday, 15 September 2003 02:00 Published by eProp Commercial Property News
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Struggling Rondebosch-based property trust Paramount, a self proclaimed ‘new generation’ contender, is looking to crawl out of a low yielding mire with the help of banking conglomerate Absa.

Property-Housing-ResidentialParamount comes with a strong Cape property pedigree, and there were high hopes for the group after its establishment three year ago.

Paramount was built up from the industrial property base in the old Ovbel Holdings. Prime movers in the process were former (and top rated) Norwich Life property specialists Rodney Squire-Howe and Bruce Kerswill.

But in contrast to its Cape counterparts Spearhead and Atlas, Paramount’s glory days were short lived and the group now lags its peers in the market. It’s not that Paramount assembled a ‘dog’ portfolio of properties. In fact the portfolio, which has a good geographical spread of mostly office and industrial properties has been independently verified as top quality.

Problems arose when a downturn in the commercial and industrial property sectors meant that Paramount could not achieve its targeted growth in earnings. The group was also hit by two ‘vacancy’ blows when Educor unexpectedly pulled out as anchor tenant at Boston House in Cape Town, while the collapse of micro-lending group Unifer left a Johannesburg property untenanted.

The problem was compounded by Paramount’s intricate capital structure. As many of its properties it acquired since formation were partly funded by issuing convertible B-Debentures the earnings base was being systematically diluted as B-Debentures are converted to linked units.

Basically Paramount’s distribution to linked unit holders is likely to fall from 80c/linked unit last year to below 50c/linked unit this year. For a property contender hoping to yield a solid return for risk averse investors Paramount’s situation was untenable…not to say downright embarrassing. Last month Absa, not-so-affectionately known as the grey shoe brigade, forged an influential position at Paramount by subscribing for 17.5m new linked units in the property group.

This means with effect from this month Absa, not exactly known for its property forays, garners a 34% stake in Paramount. The 34% stake is the maximum holding Absa could take in Paramount without triggering off a mandatory offer to the remaining body of shareholders.

In return for the Absa will provide Paramount with proceeds worth R61m, comprising a cash payment of R31m and another R30m in shares in another property investment company Growthpoint.

Observers are undecided on whether to interpret Absa’s actions as an opportunistic or a mercy dash. For one thing, most property market participants were betting on Paramount’s R815m property portfolio being spilt up amongst rival property groups.

Some of Paramount’s better known Cape properties like De Waterkant and Sovereign Quay in Greenpoint, Boston House on the corner of Waterkant and Strand Streets, Longkloof Studios in Gardens, Independence Square in Ottery, Skye Park in Airport Industria as well as the Sportmans Warehouse Buildings in Rondebosch and Bellville would certainly attract much interest from potential suitors in Cape Town. On paper the Absa transaction should significantly improve Paramount’s capital structure. The new funds (assuming the Growthpoint shares will be sold) will reduce Paramount’s borrowings, and effectively curb its gearing from over 60% to a more acceptable 50%.

Interestingly Absa is listed as one of Paramount’s funders in the 2002 annual report, although the extent of the funding is not made clear.

The cash will also be used to buy more properties, possibly with a view to increasing the group’s exposure to retail properties.

Perhaps more important is that Absa’s participation at Paramount partly offsets the group’s structural problems associated with its B-Debentures. Effectively it reduces the ratio of B-Debentures to total capital from an uncomfortable 45% to a somewhat more acceptable 35%, a ratio that should dilute further should Paramount manage to make a few property acquisitions in the months ahead.

Paramount directors last month contended that the partnership with Absa would benefit Paramount through the "association with the brand and resources of one of South Africa’s major financial institutions, as well as providing easier access to capital."

Absa has already been invited to nominate two directors to the Paramount board, as well as (perhaps more significantly) establish a new asset management joint venture between Squire-Howe and Kerswill’s Spire Property Services and Absa Corporate Property Finance. Whether Absa will play an active role in Paramount’s future looks something of a certainty.

Before Absa’s emergence as a major shareholder Marriott Property (via two separate funds) owned 10% of Paramount with local clothing and textile giant Seardel Investment Corporation holding another 13,8%.

But what exactly Absa intends doing at Paramount is not clear. While the possibility of acquisitions has been bandied about by Paramount’s management it seems a more common sense (and even lower risk) approach may be to find suitable suitors for its high quality portfolio of properties.

It’s difficult to imagine bankers, especially the grey shoed types, wanting to embark on too much fancy footwork in a tricky property market. Unless, of course, Absa Corporate Property Finance already has some property deal flow in the pipeline.

Last modified on Saturday, 10 May 2014 09:17

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