Local Westfield owner Scentre set to tap market for hybrid issue up to $US2bn

Westfield’s local malls are under pressure but the company is poised for one of the biggest hybrid issues in the wake of the coronavirus crisis.

Scentre, which owns the local Westfield mall empire, is planning a major hybrid issue in a move that will alleviate pressure on its balance sheet as the value of large shopping centres plunges. Picture: NCA NewsWire / Gaye Gerard

Scentre, which owns the local Westfield mall empire, is planning a major hybrid issue in a move that will alleviate pressure on its balance sheet as the value of large shopping centres plunges.

The company has tapped investment bank UBS to advise on an issue of subordinated notes with suggestions it could be one of the largest offers in the sector, which has remained open through the crisis as institutional investors chase yield.

The raising could hit about $US2bn ($2.7bn) and was likely to attract more than a dozen banks to assist with the raising, sources said. The hybrids will be issued in the US and Europe and have a non-call component of at least six years.

The shopping centre giant had been tipped to raise equity, with a $1.8bn issue said to have been in the wings in recent weeks. While this and even asset sales remain options for the company, issuing hybrids will help cut its rising gearing and support its credit rating.

Scentre shares jumped by 5 per cent to $2.20 as it mandated UBS as sole structuring adviser and ANZ Securities, BNP Paribas, the Commonwealth Bank, Citi, HSBC and UBS as joint bookrunners, with more banks expected to join.

The vehicle will not be listed but rather backed by wholesale funds, and a series of fixed income investor calls are slated to kick off this week.

Scentre is the country’s largest shopping centre owner, with stakes in 42 Westfields.

But these large malls have been hit hard by the coronavirus crisis as shoppers slashed non-discretionary spending, major chains argue over rents, resulting in some lockouts, and the once lucrative business model comes under pressure.

JPMorgan analyst Richard Jones said Scentre would receive half equity credit from the rating agencies and a full equity credit for debt covenant calculations. “The hybrids are an alternative to an equity issue or material asset sales,” Mr Jones said.

The size of the potential issue was not disclosed. It normally depends on demand but the analyst suggested it could be in the order of $US1.5bn-$US2bn.

“We expect the market to view this favourably given the uncertainty of whether Scentre‘s balance sheet could withstand material further devaluations,” Mr Jones said.

JPMorgan said here was no liquidity or covenant issue for Scentre but its gearing would get to the mid to high 40 per cent range if its assets are devalued a further 15-20 per cent.

“We assume this is the case and it would leave Scentre gearing well above its 30-40 per cent target range. The hybrid issue would alleviate a lot of this concern, presuming it is treated as equity in gearing calculations,” he said.

The analyst said expensive debt was preferable to the shopping centre company issuing expensive equity. Scentre is proposing to issue US tranches of six- and 10-year non-call periods, and seven years in Europe.

JPMorgan estimated pricing would be in the mid to high 5 per cent range, about 250-300 basis points over the cost of equivalent current bonds. “This is expensive debt but, in our view, is far preferred to the alternative of far more expensive equity issuance,” JPMorgan said.

The hybrid is expected to receive 50 per cent equity credit from the rating agencies and is being issued with a Baa1/BBB+ credit rating, two notches below its credit rating. It is also expected to be an effective equity security for senior debt covenant purposes.

If the hybrid is treated as equity then Scentre’s headline gearing would reduce by 5.8 per cent to 7.7 per cent, based on either a $US1.5bn or $US2bn issue. Scentre could then absorb a further 15-20 per cent devaluation of its assets and keep gearing around the top end of its target range, JPMorgan said.