US and European markets have begun the new week a subdued mood. But core global bond yields are showing some life, lower across the board while the USD is a tad softer too
Cracking housing affordability with a little help from a simple bond
A little innovation based on a big idea.
National residential developer, Peet, has been a pioneer in the simple corporate bond market, allowing Peet to strengthen its balance sheet and help more Aussies realise the dream of affordable, sustainable housing.
Affordable housing for one million Australians. It’s a big, bold vision, and one Brendan Gore, Managing Director and Chief Executive Officer of Peet, one of Australia’s largest listed property developers, is both excited about and utterly committed to.
For Gore, it’s a continuation of a heritage that has seen Peet focus on getting more people into their own homes through depression, war, booms and busts. But it’s also a robust response to a very contemporary problem in Australia. “The challenge of affordability has never gone away. Land is getting more expensive and population growth is continuing, so we have to keep focused on getting affordable product to market,” explains Gore.
Hand in hand
For Peet, an important part of the vision is delivering housing that is both affordable and sustainable. That means there’s a strong impetus towards innovation. “We’re making our homes more affordable through innovative ways of delivering land, through developing lightweight construction materials and through speed to market,” says Gore.
But it also means a different approach to water and power, based on true sustainability principles. Peet takes a holistic approach to its developments that are based on community need, rather than getting the most number of houses on the least amount of land.
“Being water wise, using solar power and integrating sensitively into natural landscape are crucial,” says Gore. It’s about being responsible, but it’s also a response to customer demand. “Our customers now expect a sustainable house – it’s better for the environment and for their own finances. We engage with our communities so we can keep evolving,” says Gore.
Solving the capital conundrum
One of Peet’s biggest challenges has always been access to debt capital to fund land acquisition as well as their property developments. And with the company growing, the challenge was becoming more acute. At the same time, land financing is complex – it needed a specialist financing partner to successfully finance in such an evolving landscape.
Peet was typically using senior bank debt as well as equity from syndicate investors, but National Australia Bank (NAB) saw capital markets as an opportunity, and in
2011 lead managed a $50 million convertible issue for the company. Comments Peter Morris, NAB’s Director – Property WA: “As the company grew, it became imperative to diversify its capital sources. The company has been a real innovator in bringing the syndication model into the property market, so we felt there was a significant opportunity to access capital markets to complement their financing model.”
For Gore, working with NAB was all about getting ahead of potential shifts in financing options. “Together with NAB, we decided to take a very proactive approach to funding and pre-empting where the industry was headed. Part of that was seeing a potential tightening of the credit cycle and using capital markets to be more in control of our destiny.”
Simplicity is the key
By 2017, the company needed to diversify its capital even more – and was eagerly eyeing the retail investor base. Importantly, Peet decided to issue its first debt capital markets deal under simple corporate bond documentation. “We already had a retail convertible bond on the market and we put a structure in place where you could convert one for the other. It opened up the retail market and made it easier to tap,” says Andrew Gordon, director, debt capital markets at NAB.
A simple corporate bond structure makes it easier for retail investors to access corporate bonds, which typically have been the domain of wholesale and institutional investors. (See below for more information on simple corporate bond structures). Peet was only the second issuer to issue under this regime and the first to tap.
“The simple corporate bonds also allowed Peet to pay down their senior debt, which opened the door to finance some significant joint ventures, and gave the group more headroom to transact on the front end of their business,” explains Gordon.
The response to both the initial transaction and the $50 million tap was strong – the initial deal was launched at $75 million and upsized to $100 million and was oversubscribed by 1.4 times. “Investors liked the bonds because they provide a yield that’s effectively asset-backed by underlying land,” says Gore. “So even though it was unsecured, there was a significant amount of security that supported the bonds.”
Accessing the corporate bond market has been nothing short of transformational for the company: “It’s strengthened our balance sheet and given us a significant increase in the term of our debt, while opening up a new funding source for the company to keep growing,” says Gore.
NAB’s extensive distribution was crucial to the success of the deal. “The whole bond was done through the bank’s investor network, which is probably the largest scale network in the country, allowing us to tap retail and super investors as well as institutional investors,” says Gore.
But the simple bonds are just one part of a larger relationship. NAB and Peet have been working together for 125 years, with NAB effectively working as a ‘house bank’ for Peet, managing all aspects of its transactional banking and debt financing for the group and advising on the formation of a bank club to help diversify its sources of funding even more.
What’s a simple corporate bond?
In 2014 the Australian government made it easier for companies and retail investors to access the corporate bond market by passing the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act.
The new ‘simple’ bonds are issued under a two-part prospectus – a base prospectus with a three-year life and a tranche-specific prospectus – and can be traded using simple retail corporate bonds depository interests. Key criteria include:
- maximum face value of $1000
- minimum size of $50 million
- fixed or floating rate
- Australian dollar denominated
- maximum term of 10 years
- unsubordinated except to secured debt
- no deferral or conversion
- step up but no step-down, so the fixed margin or fixed interest rate can step-up during the term, but cannot be decreased.
- limited early redemption rights
Benefits of a simple corporate bond
The amendment changes some of the key requirements attached to bond issuance to make the process faster and easier, particularly those around disclosure requirements and director liability.
Here are the key changes the amendment introduced:
- simpler disclosure
- reduced directors’ liability, so directors no longer have “deemed” civil liability on the combined prospectus.
- faster due diligence