SKYSHIP wrote:airbus -as stated by fof above; also RGL has net assets of c£435m, no other debt other than bank (netted off in the £435m of course) . The £50m bond therefore has substantial asset cover.
Not one I know much about so looking at the accounts. These are as at end Dec 2019, so somewhat historic now.
Property Assets of £788m, and I would ignore the right of use assets (and the lease liabilities associated with them). Other current assets broadly offset current liabilities (and unlikely to have changed) with the exception of cash of £37m. So lets call that assets of £825m.
On the liability side higher claims would be £290m of bank (or equivalent) loans. These are all secured against specific properties. There are numerable subsidiary companies so its not immediately clear if there are cross securities and charges over other property assets unencumbered, but it is clear these loans are secured against specific collateral but I would expect secondary security such that any shortfall is realisable ahead of the unsecured bond liability.
So in theory you have £535m of assets backing the £50m of retail bonds in question.
Post the Balance Sheet date we haven't had a lot of additional information, however what we do know is that (as a precaution) the REIT drew down additional loan financing from its banks of £31m. assuming this cash wasn't utilised then that's not a great concern to the bondholders, although there is now an additional prior claim as the bank borrowing is secured, the retail bond isn't. Furthermore any fresh borrowings will likely be higher ranking than the unsecured retail bonds, and I would want to check the prospectus to see if any protective covenants are in place preventing, or at least limiting, this risk.
The biggest concern then will be what has happened to the property valuations since the Balance Sheet date. I would think these would have to be lower. Looking at the assets it is clear that a number will be Office space with many now (semi-permanently) working from home these might be lower by 10-20%. The annual accounts give a good record of the largest buildings and the tenants, which include government as well as banks and other private sector companies. I don't have the time to look specifically at the likelihood of any of those tenant's businesses being affected by the work from home trend in a meaningful way. There is information available for those that wish to.
The bonds have a maturity in 2024, which is later than the RBS loan facility which could be £55m. So there is a risk that the facility will need to be rolled before the bonds can redeem. As things stand that doesn't represent a huge risk, but 4 years is a long time in property and downward valuations and illiquidity could transform this risk to a more meaningful one. Indeed the larger facility maturing in 2027 would be under stress if the 2024 bank loan was unable to roll on adequate terms.
On the income front, to service the loans, the Weighted Average Unexpired Lease Term (WAULT) is about 5 years, so longer than the life of the bonds. However, that is an average. So there will be meaningful leases expiring before redemption, and if the "work from home" isn't temporary then considerable amounts of leases could become unlet voids, or (much) reduced rollover leases. Again the details of the largest properties with details of the tenancies are in the annual report so analysis can be modelled here should one choose.
There is also the risk that the valuers of the assets are too close to the REIT, despite being independent. I haven't done any work here, but from experience the secured lenders will have rights to apply their own valuations on the security, which in a stressed market might be significantly lower.
Do I think 7.5% is the right price? Well to be honest I don't know, I don't buy fixed income, but I think the risk here is you are taking a meaningful view on the office market. For me I would analyse further, but would rather express the view via the equity, which I think says as much about my risk profile as it does about the bond pricing, but 7.5% doesn't appear as overly generous to me. You may have a 80% chance of smooth interest accrual, 10% chance of a volatile, but ultimately safe investment, and a 10% chance of a meaningful wipe out.
So I guess it depends on what you mean by "very well covered". It is certainly covered, and by some degree, at the last balance sheet date. But will it remain so over the bonds life is another question, and if so is the description of "very well" appropriate. Only time will tell. I have certainly seen worse potential investments.