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Securitisation in the property sector

Posted On Wednesday, 30 November 2005 02:00 Published by eProp Commercial Property News
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Securitisation emerges as a trend in the listed property sector of the JSE in 2005. Classic Business Day gets Nick Job, head of debt capital markets at Investec Bank, on the line to explain exactly how it works

Property-Housing-ResidentialLINDSAY WILLIAMS: Nick, can you explain in layman’s terms what securitisation is?

NICK JOB: In the simplest terms securitisation is simply another form of debt. Securitisation can be used for many things, not just property - in a property context property companies can borrow money from a bank, securitisation is really just an alternative to that. Structurally what’s involved is that a property company isolates some of its properties into a ring-fenced trust, or special purpose vehicle - that special purpose vehicle ultimately through a structure raises bonds in the capital markets. The trick here is that those bonds are rated by an international ratings agency like Fitch or Moody’s and the rate of debt - or the rates one is able to raise on the capital markets - results in a considerable saving in one’s cost of debt relative to bank debt.

LINDSAY WILLIAMS: Are these bonds tradable?

NICK JOB: They are. I think what we tend to find in South Africa, because of the size of the issues - the three securitisations we’ve seen in the property sector have all been under R1-billion - the institutional investors acquiring these bonds tend not to trade them. They are pretty high yielding relative to AAA government bonds, and liquidity is low. But theoretically they are listed, and they are tradable even though there doesn’t tend to be a lot of trading in these bonds.

LINDSAY WILLIAMS: You talk about ring-fencing certain properties – what’s the purpose of that?

NICK JOB: The key thing here if you take for example a company like Growthpoint - the most recent player in the market to use securitisation - where it could have just issued a corporate bond and used its corporate rating, the rate would have been a lot worse had it not excluded operational risk by moving those properties into a company that is what we call bankruptcy remote. This means that even if Growthpoint were to - for some unforeseen reason - go into liquidation, from a bond-holder’s point of view that trust would still remain intact with its properties, and one could still look to the properties for security even if Growthpoint were no longer there.

LINDSAY WILLIAMS: So this is an efficient and cheaper way of raising money?

NICK JOB: It really is, and I think going back to Growthpoint as an example - most larger established property companies can get money from the banks at around about 2% or so over Jibar, the securitisation rate for those companies is at about 0.5% over Jibar. I think Growthpoint got away at 0.47% over Jibar. So there is a massive saving, and ultimately all those interest savings get passed directly to unit holders - it’s money directly to the bottom line.

LINDSAY WILLIAMS: Is there an appetite for this type of securitisation from other companies as well? We’ve had Pangbourne, Vukile and Growthpoint starting the process - is there going to be more?

NICK JOB: Without giving too much away, I think we should see three or four more companies next year. What I think we are also going to see is what we call funding platforms - where securitisation structures will be set up to allow smaller companies smaller loans with that capital market technology. As a capital market specialist we are hoping to open up debt funding in the property market using capital market technology - so it’s not just the big players that can use it, in fact it should be available to everybody in the next few months.

LINDSAY WILLIAMS: We are focusing on the property sector, but moving away from that a little bit can other sectors use it in other industries?

NICK JOB: Absolutely, and I think if one were to look at securitisation internationally it really is a massive industry - it’s sitting at somewhere around $3-trillion. Commercial property securitisation is one of the four big types of securitisation, and comprises about 15% or US$500-billion worldwide. We also see securitisation for home loans - we’ve seen SA Home Loans, and we’ve seen Investec’s private mortgage transactions. We see it for auto loans - companies like BMW use securitisation. We also see it for trade receivables, equipment lease - pretty much anything that has a stable cash flow and requires funding can be secured.

LINDSAY WILLIAMS: Is there any downside? It sounds too good to be true - it almost begs the question: "Why hasn’t it taken off earlier in South Africa, which after all is a very mature market"?

NICK JOB: I think it’s been going internationally since probably the late 1970s and early 1980s - the reason why it hasn’t taken off in SA is we’ve needed both supply and demand factors come right. On the demand side I think it has taken a little while for institutional investors to get used to the idea of buying in rated structured bonds, as opposed to pure corporate bonds. On the supply side it has taken us a little while for our corporates to get comfortable with the idea of actually going through the hassle of structuring ring-fenced assets in order to raise funding. To be frank, there has also been quite a high demand historically in South Africa for tax-structured transactions, which is drying up. I think those tax-structured transactions have obviously produced rates that normal capital market funding could never compete with, but as tax structuring is no longer the flavour of the month one is finding a move towards the next cheapest form of non-tax structured fund alternative - which is capital market funding.

LINDSAY WILLIAMS: From a shareholder’s point of view - or unit holder’s point of view in terms of the listed property market - are there any benefits? Is this something that benefits the shareholders in companies if the company does securitise?

NICK JOB: Absolutely. Taking a property company as an example - if you’ve got R1-billion worth of debt, you’ll be able to save about 1.5% on that debt you should be passing an extra R15-million directly to unit holders, and that obviously has an effect on distributions and consequently affects unit prices. Taking a broader view, unit holders or shareholders would generally benefit from a broader diversified funding source. A company like Growthpoint for example has in the region of R3-billion worth of debt - banks at some point start to run out of credit appetite, and if a company like that wants to expand exponentially as it has historically it must start to look at alternative funding sources in order for it to sustain its dynamic growth pattern - that ultimately benefits unit holders, as well as the increased distribution.

Last modified on Monday, 05 May 2014 11:20

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