yes i meant BBI dilution as a result of BEPPA being converted to ord shares. but also there is a small chance that BEPPA itself can be diluted because BBI could chose to raise more funds via debt, and the BEPPA terms only allow for future debt to rank equally with BEPPA. Meaning BEPPA cant fall further down the food chain as a creditor, but could find themselves ranking on par with new creditors.
There will no quick re-rating of the BBI or BEPPA share price. Have a look at what some listed REIT's are trading at and the similarities are obvious.
Fund Name Price-to-Net Tangible Asset
Value per share (NTA)
APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%
Average 7%
From Orbis Funds management:
"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."
Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.
Patience everyone. This will take a long time.
I seriously doubt that the BBI management would allow BEPPA to dilute BBI holders. Fiduciary obligations aside, most BBI management probably get their incentive payments in the form of BBI stock. I cannot imagine the management would decimate their own shares. It would be against their self interest to do so.
i would agreed with your list of scenarios and pretty much in that order of likelyhood until i read the Australian Financial Review and they hinted at rumour of a capital raising ala AIO. AIO went that route, and RIO did similar when the assets up for sale couldnt achieve a satisfactory amount. obviously in both those cases the share price was adequate to raise further funds via share placement.
Reading between the lines, most rumours have some foundations. i would SUSPECT that:
1. BBI knows DBCT is a great assets and wants to keep a stake
2. DBCT offers are either all unacceptable; OR
3.the offers for minority stakes value DBCT higher than 100% offers
for example maybe they have been offered $1.4bil for 49% interest, but only $2.6bil for 100% sale. so i think the rumours are there because at some point they have decided to explore there options regarding raising funds so that they can either keep all or part of DBCT.
to raise more capital at these prices is impossible, but if they sold 49% and price jumps to 20 odd cents, they could probably try then. but any instos would want sparcs and beppa gone. who would invest large sums in bbi knowing that sparcs/beppa rank higher in liquidation.
the more likely scenario is to convert sparc/beppa into a combination of cash/bbi script at a premium to the current market value but at a discount to face value. it will alter the NTA and EPS but will please bankers bcos the gearing will be lowered.
it will then allow new bbi script (on equal terms, nobody ranking ahead)to be floated if funds are required or a new debt security that ranks above bbi ala beppa.
They let it happen with SPARCS didnt they? and its going to happen again in november with SPARCS. So i cant see how BEPPA is any different, wether its near term to get SPARCS and BEPPA off there books at a discount, to help straighten out there structure and pave way for capital raising.
or sometime in the future, when beppa is due or near due for redemption. it would be naive to think that beppa and sparcs will be paid out only in cash and that dilution isnt going to occur, its more a matter or at what point in time and at what price(what will bbi sp be at conversion time and will they convert beppa for $1+ or say 50cents)
I agree with the first part of your scenario. BBI will sell enough of DBCT to relieve immediate financing pressures, and that sends BBI shares up significantly. At that point they do a financing to try to raise some additional amounts to buy more breathing room.
That's where I lose you. Why do you believe they would have a right to force BEPPA holders to convert immediately? I thought the first conversion date was July 2012? Does BBI have some option to force a conversion of BEPPA at an earlier date? What are details on that?
By the way, is SPARCS something we can invest in? What is the symbol? It would be interesting to see how that one is trading. And I guess they are getting preference over BEPPA now.
its listed on the NZ exchange, so nothing stopping you but i guess your broker needs access and you need to be aware of different taxes that may apply. also they arent very liquid.
http://www.nzx.com/markets/nzdx/BBN010
thats the link for sparcs in nz but i need more words to get the post accepted
This business is mediocre because of the extremely poor returns it generates on it's assets, a fact which is indisputable looking at their historical returns over the past 5 years. This has been mentioned numerous times and noone has disputed it. Until those returns improve significantly it will continue to be a dog of a business.
The share price on the other hand whilst it has been a dog, may do extremely well for those who bought in at the lows, if the company is able to survive and ekes out the the paltry returns projected by the likes of Wilson HTM.
No they cant force BEPPA holder to convert early. But a 49% sale wouldnt be sufficient and if your choice was to vote down a conversion, they can point out the very real risk of liquidation or that they threaten to issue more beppa to the point that your beppa will see very little in liquidation. Besides they'd be offering a premium to convert, i suspect most would accept 50cent this year rather than a POSSIBLE $1 in 3years. the likelyhood of a re-rating to 50cents this year is unlikely so its the quickest, biggest return possible. throw in a priority and discount to any new offering as a sweetner.
im not saying they MUST or WILL get rid of sparcs/beppa, but i think its more on the cards now than ever.
This will end up as dilution by another name really. The fact is that they are increasing the number of shares exponentially for very little cash. You would need the BBI SP to be much higher than it is now.I agree with the first part of your scenario. BBI will sell enough of DBCT to relieve immediate financing pressures, and that sends BBI shares up significantly. At that point they do a financing to try to raise some additional amounts to buy more breathing room.
BEPPA matures on June 30, 2012. Nothing changes that until a proposal is put forward by BBI EPS Pty Ltd and passes a vote of security holders.That's where I lose you. Why do you believe they would have a right to force BEPPA holders to convert immediately? I thought the first conversion date was July 2012? Does BBI have some option to force a conversion of BEPPA at an earlier date? What are details on that?
I cannot see it happening any side of 17 November 2010. That is the next reset date for SPARCS. If no reset if offered (or terms are voted down) then SPARCS matures and conversion takes place. Until SPARCS is out of the way, you will see nothing happen with BEPPA. BBI may see a capital raising but I do not believe it to be in BBI holder's best interests until the SP is > 40c and even then it really should be more like 60c.No they cant force BEPPA holder to convert early. But a 49% sale wouldnt be sufficient and if your choice was to vote down a conversion, they can point out the very real risk of liquidation or that they threaten to issue more beppa to the point that your beppa will see very little in liquidation. Besides they'd be offering a premium to convert, i suspect most would accept 50cent this year rather than a POSSIBLE $1 in 3years. the likelyhood of a re-rating to 50cents this year is unlikely so its the quickest, biggest return possible. throw in a priority and discount to any new offering as a sweetner.
I understand the idea you are promoting, but it simply cannot happen while SPARCS is in market. Once the cash sweep is gone, and SPARCS has converted (or been paid out), only then can BEPPA distributions resume. After BEPPA distributions resume, I think BBI will look to buy BEPPA back on-market at a discount.im not saying they MUST or WILL get rid of sparcs/beppa, but i think its more on the cards now than ever.
The SPARCS rate is now 10% - the reset terms stated this. Look at the SPARCS meeting results release.im interested in others opinion too, but at a huntch i would suspect that SPARCS paying 8.5% versus BEPPA paying a bit above the current bank swap rate is the main factor. they are probably about 3% pa better off than us.
Mitsimonsta in another forum said:One of the issues I have with BBI is the fact that they are likely to suffer massive dilution of their equity when SPARCS finally does convert, and yet the assets (and as a result of that, revenue also) is going to drop due to sales of the assets.
While it is too far in the future to speculate because we need to see how SPARCs converts first (I mean the conversion rate) and/or what other options are made available for that before we even contemplate BEPPA.
Of course, dependent on how many SPARCS convert on 17 November 2010 and at what ratio is going to be the biggest issue with BEPPA. It also depends if they offer to reset terms again, and at what interest rate. They then need to get that passed at a meeting.
There is also the option of paying out cash instead of stapled securities. I would imagine that this would have to be at a premium, possibly as high as 5% for a full conversion to cash and then sliding down to smaller amounts. Again, I have not read the SPARCS material in it's entirety, but I believe that this would have to be passed by the bondholders at a vote.
I feel that talk of BEPPA resetting (while I expect it) is a little premature until we get to the next SPARCs reset date which is 16 months away. Again, there would have to be some fairly big margin interest jumps in order to satisfy the BEPPA holders. SPARCS went from 8.5% to 10% p.a. but since BEPPA is floating rate (BBSW + 1.15%), I would suggest that the bonus component will need to at least double to ensure a motion to be passed.
Really, it is DBCT sale news that will generate the cash to pay down the corporate debt, which should mean that the cash sweep should cease. Hopefully the asset-level debt can start to be paid down after that. Right now, BBI needs to bring down the debt amounts so that when it comes to refinance, they are not put in a worse position by higher interest rates that are sure to be imposed by creditors.
BEPPA is not a sure thing. But for me, the risk taken in dollar terms is not massive, and I can stand to lose my entire holding and not commit suicide. I got into BEPPA as I believe that the current price is undervalued, and if everything does come off, then it will drive my portfolio into its next phase.
My aim was 50,000 units @ 10c average ($5k to purchase $50K debt). Much higher than that and I would start to become uncomfortable about the capital at risk. Each person is different, some may feel uncomfortable at $1k of capital invested. Some might feel happy to put in $20k and look for more. It's all about your current financial position and goals.
I believe in the capability of BBI to pay the accrued distributions of BEPPA at 30 June 2012. I do not believe in BBI's capability to buy back the EPS at that date, or willingness to convert to stapled securities on that date due to dilution of current stapled security holders, hence I expect reset terms to be offered that are attractive enough to achieve a positive vote to the proposal.
I also expect that once SPARCS and the cash sweep is gone, and BEPPA holders are up to date in distributions, that BBI will look to start repurchase debt on the open market. As soon as this happens, watch the SP rise. This is one way that BBI can address the question of stapled security dilution while retiring debt at a discount.
If you are a BBI/BEPPA holder, then why not ring the Investor Relations line and ask?How much of this can we pay out of cash flows and which ones will require asset sales to cover?
I assume the sweep agreement for corporate debt allows the principal on all of these debts to be paid first?
Agreed. There is $3.5B worth of writedowns that has to happen before my $1 of debt is at risk.A few comments:
-A big snip-
So am I concerned about my BEPPA holding, simply no.
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