Tuesday, 22 January 2019

Shop till you drop

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The separation of Westfield into two distinct units has been welcomed by fixed-income investors but will its credit metrics survive a commercial real estate downturn?

Australian retail property giant Westfield, a global developer of shopping malls, merged its Australian and New Zealand assets in 2014 with Westfield Retail Trust to create Scentre. Investors hailed the merger, with Scentre bringing some highly successful trades and Westfield continuing to issue. But could the group’s metrics deteriorate as the froth comes off the Aussie property bubble?

The A$70bn spin-off of Westfield’s Australasian shopping malls to Westfield Retail Trust gave Westfield shareholders around 50% ownership of Scentre but was not without controversy, with grumbles that the trust might have overpaid for the assets.

Initially, Westfield Retail Trust shareholders appeared on the verge of rejecting the deal on the basis that they would be saddled with a debt-laden enterprise at too high a price.

A second vote saw the deal approved, and the group comprises Westfield Corporation, which owns malls worth A$27.7bn in the US and United Kingdom, and Scentre which owns malls in Australia and New Zealand worth A$39.4bn. Westfield Retail Trust shareholders own 51.4% and Westfield security holders 48.6% of Scentre respectively.

The enterprise is run by the Lowy family under the chairmanship of Frank Lowy, who opened the company’s first mall in Sydney in 1959 after emigrating to Australia from Hungary via Israel in the early 1950s.

Westfield saved considerably on fees and emphasised the competence of its management when it self-arranged last year a stratospheric A$22bn (US$20.4bn) loan to finance the restructuring, which eventuated in the emergence of Westfield Corp and Scentre Group. The deal comprised A$14bn of two-year bridge facilities and A$8bn of two to six-year bank facilities.

Solid relationship

Some 20 banks participated in the transaction, keen to maintain a solid relationship with one of Australia’s key corporate issuers. The ratings agencies were not enamoured of the restructuring however, with both Moody’s and S&P knocking Westfield’s Corp’s rating down a notch to A3 and to BBB+ respectively after the loan closed.

Whatever the complexities of the present structure, there’s little doubt that Westfield has been the darling of the G3 debt capital markets over the past decade or so, and the newly created Scentre has had little problem in attracting investors.

In July 2014, the company made a stunning market debut, printing a €2.1bn (US$2.3bn) four-tranche deal in euros and sterling that represented the biggest debut issue from an Australian corporate enterprise outside the commodity or FIG sectors.

It followed this up with some hyperactive issuance, bringing two US dollar Global deals within a week in November, comprising a US$750m five-year and a US$600m 10-year. Both were priced well within guidance and inside the implied Westfield curve.

And in April, Scentre raised US$1bn through a six and 10.5-year Global issue, managing to print with tight concessions versus its implied curve. This was a welcome contrast to the sterling trade that Scentre brought in early April after a three-week marketing drive and that garnered a scant initial £750m book for a £400m print.

All told, Scentre has successfully visited the offshore debt market four times since its inception, rather impressive for a newly minted enterprise. Equally impressive was Westfield Corp’s ability to raise US$3.5bn last September in a four-part transaction that appeared to demonstrate that the markets have fully embraced the company’s restructuring.

The deal, which took out a bridge – the loan markets have been perennially as friendly to Westfield Group as the bond markets have been – came in through the company’s implied curve and attracted a chunky US$12.8bn book for more than three times cover.

Auspicious reception

Despite this apparently auspicious reception from bond investors, many express concern that the debt levels at Scentre, which rose from A$2.9bn to A$12.2bn after the restructuring (admittedly with a concomitant rise in assets from A$13.7bn to A$28.6bn), might lead to debt service stress should the Australian property boom reverse and with it rent levels.

This has been a concern for Westfield equity and bond holders for at least five years, as Australian property prices have soared; but the Aussie property market, despite being massively overvalued in terms of affordability based on household incomes, has been remarkably resilient.

The group is hedged on the basis of its geographically diversified portfolio and sits on prime real estate that retailers prefer over any other (with long leases including built-in rent increases) and has a record of pouncing opportunistically on any property downturn.

“It’s tempting to look at Westfield and suggest that the group is a debt-laden play on property values and the strength of the retail market in the countries where it operates. But it is a fierce generator of cash and has as solid a management record as you can find,” said a Hong Kong-based loan banker.

Nevertheless, it’s worth going back to what Moody’s wrote in a ratings report in late 2013 when the restructuring was first proposed.

“The loss of the Australian assets – which we consider to be among Westfield’s best shopping centre assets – will have a significant negative impact on Westfield’s business profile … if the restructure proceeds, as planned, Westfield’s credit profile would be weaker as a result of the lower asset quality, narrower asset base, and diversity.”

On that basis, given a choice between buying into Westfield debt or the spun-off Scentre, the latter looks more appealing. There should be ample opportunity to make this relative call over the next few years as both subsidiaries show no sign of pulling back from debt-funded expansion.

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