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What Does CapitaMall Trust’s Successful Retail Bond Offering Mean for Its Investors?

Yesterday, CapitaMall Trust (SGX: C38U) made a media announcement about its successful retail bond offering that was first made known last Monday.

CapitaMall Trust is a real estate investment trust with a portfolio of retail malls located primarily in Singapore. It’s managed and partially-owned by CapitaMalls Asia (SGX: JS8), and in turn, both shares are part of the real estate group CapitaLand (SGX: C31).

The initial plan for the REIT was to offer S$150 million worth of bonds to individual investors in Singapore and an additional S$50 million to institutional investors (think big money managers).

But due to the overwhelming popularity of the offering – the former was 2.8 times subscribed while the latter’s at 2.4 times – CapitaMall Trust has bumped up the offering to the maximum size of S$350 million. So now, S$250 million would be allocated to individual investors while the remaining S$100 million would go to the institutions.

Those bonds are due for repayment in 2021 and would start trading on the Main Board exchange on 21 Feb 2014. They also carry a fixed annual interest of 3.08% that amounts to S$10.8 million per year in added interest expenses for CapitaMall Trust.

All told, the retail bond offering was a popular one for bond investors. But, what does it mean for investors in CapitaMall Trust itself?

Though the retail bond offering could be seen as a rather small drop in the ocean for the REIT (given that the trust had S$3.56 billion worth of borrowings as of 31 Dec 2013 excluding the new bonds in question), there’re still interesting nuggets to learn about it in the context of being an investor in the units of CapitaMall Trust (as well as other REITs, for the matter).

1. Proactivity of CapitaMall Trust in refinancing loans

Based on the REIT’s latest full-year earnings presentation, it had S$500 million worth of debt coming due by the end of 2014. Out of that, there’s a S$350 million slug of convertible bonds (with a newly-adjusted strike price of S$2.1958 per unit) carrying an annual interest rate of 2.125%.

From the looks of things, it seems reasonable to assume that the convertible bonds would be refinanced by the retail bond offering (assuming the former does not get converted – an assumption that’s also logical to make given that the REIT’s units are selling for S$1.85 apiece currently) which showcases the REIT’s proactivity in refinancing its borrowings.

2. Cost of new debt in relation to old ones

Though the retail bonds carry an interest rate lower than CapitaMall Trust’s current average cost of debt of 3.4%, the REIT’s still replacing the convertible bonds with more expensive debt judging by the difference in interest rates between the two debt-instruments.

And though it’s by no means a definitive trend for all of the REIT’s future refinancing deals, this brings us to the third takeaway.

3. The REIT’s ability to refinance itself

As investors in a REIT, it is important to pay attention to its ability to refinance its loans at a reasonable cost. If investors see a sustained trend in a REIT having to refinance its borrowings with loans that are increasingly more expensive, that would certainly warrant a second look at the REIT’s fundamentals.

Increased interest expenses can not only depress distribution yields for investors, it could also make it even harder to obtain new loans, leading to a vicious cycle of higher interest expenses and even more expensive debt.

4. Flexibility in financing sources

CapitaMall Trust’s retail bond offering is unique among its peers as there are hardly any other REITs that have showcased an ability or willingness to tap into another source of debt-funding – the individual investor.

All things equal, it’s better for a REIT to have access to as many sources of debt capital as possible.

Foolish bottom line

It’s perhaps a normal occurrence to see REITs issuing new loans every now and then. But, it’s normalcy doesn’t mean an investor shouldn’t pay attention to them. With CapitaMall Trust’s case, even a relatively small retail bond offering could offer up some valuable takeaways for its investors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.