Scentre hybrid issue buying time in COVID environment

The hybrid can be bought back at any time and Scentre has the option of not paying the coupon rate if it also stopped paying dividends.. Picture: Toby Zerna

Scentre Group’s Peter Allen has bought himself increased financial flexibility with a landmark $4bn US hybrid issue as he attempts to adapt the company to the post COVID world.

The issue, arranged by UBS, is a first for the company and also the first big US hybrid issue by an Australian corporate since the GFC.

It comes against a background in which Allen has repeatedly rejected eager investment bank calls to issue equity to push down his gearing.

Allen learned the game from the Lowy family which was also reluctant to issue equity but in its case it was to protect the company’s shareholding in the old Westfield companies.

The issue at 4.75 per cent for six year notes and 5.12 per cent for 10 year notes is expensive debt but arguably cheap quasi equity.

The company’s NTA at $3.66 a share is well above today’s price which allied 3.3 per cent to $2.34 on the news.

This means the expensive debt replaced even more expensive equity.

The rating agencies treat the hybrid as 50 per cent equity and the issue reduces gearing from 38 to 27 per cent.

This it should be noted is above industry peers like Stockland at 25.4 per cent.

Typically when the market thinks a company is due an equity raising its stock price will fall and Scentre fell from $2.73 back in June to under $2 a share last month.

This partly explains today’s rally but there are some around the bourse who think at some point an equity raising is inevitable.

COVID has clearly hurt the shopping centre group and challenged its operating model even as Allen had it on track to be more a “living centre” with more of the centre being taken up by non shopping activities like movies, gyms, medical centres and the like.

The post COVID regional push could play into its hands even though it does have some big centres in the CBD.

Some store owners are demanding a shift in rental terms from CPI plus to a percentage of sales but the latter would put the company in the frame as a trailer rather than a mall owner and Allen is resisting.

The hybrid can be bought back at any time and Scentre has the option of not paying the coupon rate if it also stopped paying dividends.

So it has bought Allen some financial flexibility while he works out the best operating model going forward.