Real estate bond issues no longer viable, says JSE-listed MAS

This would affect its planned €500 million (R10.1 billion) bond in the 2025/2026 year to refinance maturing Eurobonds. In 2021, MAS issued a €300m Eurobond. Photo: EPA

This would affect its planned €500 million (R10.1 billion) bond in the 2025/2026 year to refinance maturing Eurobonds. In 2021, MAS issued a €300m Eurobond. Photo: EPA

Published Jan 30, 2024


JSE-listed European property investor MAS says non-investment grade (IG) rated real estate bond issues are no longer viable as the sector is priced for default.

This would affect its planned €500 million (R10.1 billion) bond in the 2025/2026 year to refinance maturing Eurobonds. In 2021, MAS issued a €300m Eurobond.

“Unforeseen circumstances occurred since then, significantly reducing the likelihood of MAS achieving IG in time for a bond issue in 2025/2026 and making bond issues unviable for non-investment grade real estate issuers,” MAS said in an investor presentation yesterday.

This means that the bonds maturing next year will require refinancing in the secured debt market, increasing competition and putting pressure on bank debt availability, the company, which invests in and operates green retail assets in Europe, said. Its properties are in Bulgaria, Romania and Poland.

The company accrues returns from its directly owned income property and operations in the region. It also amasses income from indirectly owned property, through listed property investments and from a joint venture partnership with Prime Kapital.

In 2021, MAS issued its inaugural €300m green Eurobond, and undertook to pay cash dividends in 2021 on the condition that its strategic objectives were not under undue risk. It also considered that alternative attractive investment opportunities would not be available until the bond’s maturity.

“The achievement of its strategic objectives by June 2026 would have implied an increase in scale, partially via increases in gearing levels, and would have resulted in positioning for an investment grade (IG) credit rating. The latter would have allowed MAS to refinance with a €500m bond in 2025/2026, in advance of the current bond’s maturity,” it said in the investor update note.

Now, with “unforeseen changes in circumstances” having occurred, the likelihood of MAS achieving IG rating have significantly reduced.

“MAS has considered all capital allocation options available to it in the current context, with the overarching goal to maximise total long-term returns per share and aiming to source capital required to replace its bond maturing in 2026, but also the additional €200m that was planned to be raised by then.”

The company is now retaining earnings from its operations to cover the shortfall. This means that “dividends (which) are discretionary will be skipped” while it has put in place plans to “raise new secured debt on all unencumbered” properties.

“With non-IG real estate credit priced for distress, reliance on debt capital markets for finance in 2025/2026 is no longer a sensible option for MAS. As such, MAS has put plans in place to avoid value destructive options, such as a significant rights issue, if a large bond issue (of €500m) remains unviable,” explained MAS.

Developments in European secured debt markets such as the “availability of debt under pressure due to banks’ commercial real estate exposures limitations” and increased “demand from previously unsecured real estate debt issuers refinancing in the secured debt market” had made it difficult for MAS to go for this option.

Moreover, quantitative tightening measures on bank reserves, increased scrutiny of real estate valuations, including from ECB and European banking markets affected by bank defaults such as CreditSuisse/UBS, had militated against reliance on capital markets.

There have also been stricter covenant criteria and bank requirements for debt amortisation as well as higher debt service costs.

Unlike South African-listed REITS, MAS says it does not “suffer any tax burden” if a dividend is not paid.

The other option was to offer a cash dividend with SCRIP alternative, but this means that MAS would be likely to distribute €63m–€113m of funds necessary to cover its dividends’ cash alternative until June 30, 2026. This would increase the “risk of value destructive rights issue”.

Worse still, any “discount offered to encourage uptake of the SCRIP dividend would need to be significant, and likely lead to further value destruction” for the company.

Shares in the company surged 4.41% to R18.95 of the JSE after the investor presentation was released. The company’s stock is up nearly 30% in the past three months.