Has the wave of debt issues by foreign real estate companies on the Tel Aviv Stock Exchange (TASE) ground to a halt? Senior executives at underwriting firms will try to analyze this question soon, following yesterday's failure in the preliminary institutional stage of the huge planned issue by Wharton Properties (BVI). Owned by US real estate billionaire Jeff Sutton, one of New York's leading developers, Wharton should have been a showpiece among the foreign TASE offerings. The company, which holds a long list of income-producing properties around Manhattan occupied mostly by prestigious fashion chains, received the highest rating of any foreign company so far (AA from S&P Maalot). Wharton was trying to raise the largest sum ever from investment institutions in Israel - up to NIS 2 billion at up to 4.8% in effective interest. After receiving the envelopes from the participants in the preliminary tender, however, Wharton announced that in view of the negative conditions in the Israeli bond market, and given the current uncertainty and volatility in the global financial markets, the company had decided at this stage not to go ahead with the issue, and not to publish a supplementary announcement. Wharton added that it would continue to keep track of the market conditions.
Cold feet about the interest rate decision
Wharton did not disclose the extent of the demand in the institutional tender, but sources close to the issue said that the amount was less than NIS 1 billion, and that at the maximum interest rate offered in the issue. Other underwriting market sources were more skeptical, saying they believed that demand in the tender had been far lower, totaling less than NIS 500 million, indicating extremely minor participation on the part of the institutions that had been counted on to provide most of the demand in the issue. According to these sources, the recent drop in government bond prices in the US and Israel ahead of the decision by the US Federal Reserve Board about the interest rate had also had a negative impact, but the main reason was the issue's complicated structure and the main changes made in it since the first draft prospectus was published in early May (over 10 different draft prospectuses have been published to date).
In contrast to other foreign real estate companies, which chose to use the process of the debt raised to renovate and upgrade existing properties, purchase income-producing properties, or develop and construct new properties, Sutton decided that the debt money would be used for financial deals involving the purchase of existing loans.
Why Midroog's rating disappeared
In May, when Wharton first tried to put through its huge debt offering, it wrote in its draft prospectus that NIS 1.9 billion, most of the amount to be raised, would be used to acquire expensive mezzanine loans previously taken from US banks for the purpose of financing the purchase of three properties on Madison Ave. Broadway, and Fifth Ave. This prospectus drew an AA rating from S&P Maalot and a corresponding Aa2 rating from Midroog. Difficulties with some of Wharton's existing financing institutions, however, cause Sutton to alter the format of the offering. A new prospectus was issued last month, in which it was written that NIS 762 million of the amount raised would be used to purchase loans through preferred capital secured by two Fifth Ave. properties (one of which would remain outside its portfolio even after the issue), while NIS 972 million would be used to provide mezzanine loans to other companies from Sutton's Wharton group, or to purchase such loans granted in the past to finance properties it had purchased.
This new prospectus lacked any rating from Midroog, and this may have also detracted from its success. Besides Sutton himself, the losers from the postponement of the offering are Poalim IBI Underwriting and Investments Ltd. (TASE:PIU), the pricing underwriter, and the various advisors, including the lawyers, accountants, and financial consultants Gal Amit and Rafi Lipa. All of these would have received the lion's share of Wharton's projected NIS 48.5 million in issue expenses, had the full amount of NIS 2 billion been raised.
An underwriting market source believes that Sutton's mistake was deciding against adherence to the basic principle of composing an offering prospectus: it should be simple and understandable to the investors. "The issuer is terrific - an amazing group with the best properties around, but it wanted something else, and it wasn't successful," the source noted. At the same time, the source said that Sutton's lack of success did not indicate the fate of the coming offerings by foreign real estate companies. "There are currently five companies that have already submitted prospectuses, and twice that many who are considering the matter. Yesterday's poor demand does not close the faucet to US issues. The underwriters will learn from what happened - that in order to succeed, simple offering based on properties, not financial deals, are what is needed."
Next in line: the Schlesingers
Raising debt in Israel is a long process for a foreign real estate company; it usually takes at least six months. If it is rejected or delayed, it can therefore still take place when the local market shows signs of recovery and the public once again pours money into the local mutual funds. At the same time, it appears that at least for now, the financial institutions have become more selective towards foreign companies, and currently prefer companies with a simple legal and financial structure and a group debt rating of A or higher, and which rely on high-quality income-producing properties and have a relatively limited scope of development activity.
The most recent foreign company to complete an TASE issue was David Marx's MDG Real Estate Global, which this month raised NIS 96 million at a high 8.9% interest rate, with 30% of the amount raised coming from concerns related to the underwriters. For Marx, who tried to raise NIS 200 million here last year, and settled for half that amount this year, the success was only partial, and it will be interesting to see how the company deals with the repayment of its expensive debt.
Another company slated to try its luck in debt issuing next month is Copperline Americas, owned by the Schlesinger family. The company last month submitted a prospectus for a NIS 400 million bond issue, and obtained an A rating from S&P Maalot. Like all the foreign real estate companies, Copperline Americas is also a special purpose vehicle established by Copperline Partners Group for the purpose of the bond issue; with the completion of the bond issue, Copperline Americas will be assigned ownership of 139 buildings in the states of New York, Connecticut, and Florida with nearly 3,000 rental apartments and 250 hotel rooms.
Copperline, for example, plans to use most of the issue proceeds, $85 million, to buy additional part of the properties in which it is a partner, and to repay existing loans on properties and renovate buildings it owns for the purpose of adding 317 rental apartments and 60 shops to its portfolio. Sources close to the Copperline issue said today that it was expected to get underway next week, or immediately after the Sukkot holiday at the latest, depending on the state of the market. In any case, the sources assessed Copperline as a high-quality company, and said that Wharton Properties' lack of success should not have any effect whatsoever on Copperline.
Published by Globes [online], Israel business news - www.globes-online.com - on September 20, 2015
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