Structuring debt packages to optimal levels

Posted On Wednesday, 14 November 2007 02:00 Published by
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There is more to successfully managing a property portfolio than purchasing quality properties in well-located areas which are occupied by good tenants

The cost of finance is key to a company’s competitiveness in acquiring new assets – the lower the cost, the more enhancing a transaction can become to the linked unitholder of a PLS company.

As PLS companies are Reit-like and do not retain earnings, finance for a new acquisition is obtained through the issue of new units or through debt.

Debt is raised either through banks and other lending institutions or through accessing the capital markets, via a securitisation or conduit.

When considering sources of finance, solid relationships with financial institutions, which are able to provide innovative financial structures, access to the capital markets and appropriate interest rate risk management products, are key for PLS companies.

The introduction of securitisation to the South African market – with companies such as Growthpoint, Pangbourne and iFour having obtained debt from the capital markets in this fashion – has increased competitiveness amongst lenders.

“Securitisation has certainly played a role in reducing the margins levied by banks to the property sector. The difference between where banks historically priced listed property credit risk and the spreads demanded by the capital market for the same risk, together with statutory changes to the manner in which banks’ capital costs are calculated, has contributed to a more competitive bank finance offering. In the current market, some banks are offering rates similar to those achieved by securitisation,” says Simon Fifield of RMB Property Finance.
 
This huge increase in competitiveness in the market is extremely beneficial to the property sector.

While the ability to access debt and receive good margins is immensely important, the ability to obtain solid, strategic advice on managing interest rate risk is invaluable. Good advice on when to fix interest rates, the duration of such fixes and the benefits and costs of retaining flexibility in this regard, is vital to any PLS utilising debt.

The management strategy of future-cost-of-debt risk can benefit hugely from the input of skilled analysts using the best technologies and calling on valuable experience, which will result in the best overall finance package.

“A pro-active approach to the management of interest rate risk, with appropriate input from those with specialist expertise in that area, can add significant value to unit holders, both in the short-term and the medium- to long-term,” says Fifield.

Ordinarily, the cost of debt is cheaper than that of equity, however in the current cycle this has been reversed. Even in this market, the importance of obtaining the ‘best’ debt package cannot be underestimated. Most notably it is access to debt that best provides flexibility in terms of short-term capital raising for acquisitions and allows PLS companies to be agile and competitive.

“RMB, which is South Africa’s fastest-growing property finance business, approaches all ventures from an investment banking perspective, and, by leveraging the intellectual capital of other divisions within the bank, is able to offer a variety of financing solutions,” explains Fifield.

In order to meet the needs of the listed property sector it offers a cradle to grave solution, by providing bridging and long term balance sheet finance, conduit funding and ultimately, should it be appropriate, securitization expertise. RMB Property Finance also provides development and mezzanine finance, portfolio and single asset lending to unlisted entities, lease discounting, BEE structuring and financing, and is able to utilize its balance sheet for the assumption of principal equity positions.

RMB’s innovative, flexible solutions are underpinned by proactive interest rate hedging strategies tailored to ensure the optimal funding package for each client’s particular requirements.


Publisher: PLSA
Source: PLSA Newsletter

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