TTP capital restructuring offer only fair to middlin' - analysts

Friday 27th April 2001

By Campbell McIlroy

Analysts have questioned the timing of Trans Tasman Properties' capital restructuring as the property market hits the bottom of the cycle.

An independent appraisal report from Grant Samuel & Associates has assessed both the convertible capital note and share arrangements as fair.

One analyst said the arrangements gave investors an opportunity to gain some value but questioned whether it was at a realistic and fair value.

He said the poor long-suffering shareholders had listened to directors wax lyrical about the value within the portfolio.

Now they were faced with the situation that suddenly the company did not think there was much value in the portfolio and this was the only way investors could hope for a return, he said.

The analyst also said that, under SEA's leadership, management had not faced up to the issues confronting the portfolio, namely over renting, and had now made a less than satisfactory offer to shareholders.

"A cynic might say SEA was acquiring the company at close to the bottom of the property cycle at a very good price," he said.

Questions also remained over what tax benefits might be afforded to SEA under the new arrangement, he said.

Officials at TTP deferred to executive chairman Don Fletcher's original comments when the scheme was announced.

"The directors, in considering this proposal, have been mindful of the company's financial ability to honour its commitments under the proposal," he said.

One official added this meant the scheme had been put together on the basis of what the company could afford.

Shareholders and note holders will be asked to vote on the offer, which requires 75% from the respective groups to proceed.

If shareholders reject the offer note holders can still vote to proceed but if note holders reject the offer it will not proceed whether shareholders support it or not.

Grant Samuel's appraisal highlights the state of the portfolio when considering the valuation of shares in TTP.

The report said the book value of the portfolio was $609 million as at February 28 but Grant Samuel valued it at $502.9-549.4 million.

This was explained by the assumptions in the discounted cash flow of higher levels of expenditure on capital works and tenant inducements and lower rental growth than those assumed in the property valuations used to establish book value.

The appraisal also revealed offers were received for one third of TTP's New Zealand portfolio by value during the past 12 months.

The weighted average discount to book value implied by the offers was approximately 25%, one factor that led Grant Samuel to assess the offers as fair.

In the case of the notes it was more favourable than the only available alternative, the status quo, because the existing arrangement to convert a CCN to a TTP share on maturity has no value.

Noteholders will receive a $1 secured bond for each $1 CCN redeemable for cash on June 27, 2007, with a 10% coupon payable quarterly.

The risk is that TTP, already highly geared, will incur higher interest expenses and increased interest rate risk over a longer term.

In a high-interest environment TTP may have to suspend payment of interest on the bonds which would incur a penalty interest rate of 12%.

The offer to shareholders involves 35 $1 secured bonds for every 100 ordinary shares held, again earning 10% payable on a quarterly basis and redeemable on June 27, 2011.

Penalty interest of 12% is also payable if payments are suspended but the 2011 bond ranks behind the noteholders' 2007 bonds for payment of principal and interest. Both bonds, at TTP's option, can be subject to early redemption in total or on a pro-rata basis on June 27, 2003.

Holders of the 2007 bond can also opt for up to 50% of the bond to be redeemed for cash on December 27, 2005.

The vote will be held after the company's annual meeting on May 21 and if the motion is carried the scheme will be implemented on June 27.

Comments from our readers

No comments yet