Wow, I seen some very upset folks on forum bashing the recent rescue plan announced by Manulife US REIT ("MUST") and wanting immediate liquidation. Personally, I do also feel short-changed given the high financing charges of the rescue loan from the Sponsor but note that there is no other viable alternative plan on the table currently in this dire and critical situation. The 9.8% restriction of individual unit-holders maximum holdings under the Trust Deed of MUST also means that the usual rights issuance rescue to be undertaken by the Sponsor or other White Knight under normal circumstances is not feasible for US assets REIT due to the tax efficient structure being crafted in place to avoid a hefty 30% withholding tax being imposed. Also, no sane bankers will want to underwrite the rights issuance when the whole US Commercial REIT market is in doldrum and winter mode.
1. The consequences of a breach of loan covenant is being underestimated by some existing investors.
I think that some investors are under-estimating the severity of the current breach. Note that this is just a step away from financial disaster. The bankers can call for a recall of all the bank loans immediately. Some of the grave repercussions that I can think of are as follow:
(a) Defaulter interest (if it has not already been imposed) of 2 times -10 times the original rate (depending on what was in the loan agreements);
(b) Tenants maybe able to exit their current rental agreements with MUST under clauses inbuilt for such situation and rental income will drop drastically which further pushed down resales value;
(c) Prospective tenants will not want to sign lease with an office landlord that does not even have the funds to expend for basic building maintenance and essential repair;
(d) exorbitant professional restructuring consultation fees as well as lawyer's legal fees further burning up available cash hence leaving nothing for unit-holders;
(e) fire-sales does not mean 25% discount to latest valuation. It may be even 50% (as we have seen in Eagle Hospitality) or more. The bankers do not care about obtaining the highest value for unit-holders. They will seek to auction all properties at the highest bid even if the current market situation resulted in massively discounted offers by bidders during a firesales. A couple of potential buyers have also failed to get the necessary bank loans to buy over office building from MUST due to the virtual credit freeze in the US Office sector so it appears that a super huge discount to last valuation maybe required in forced liquidation.
Due to the above, in every such forced liquidation, there is a high probability that unit-holders (being the last in the queue of claims) will be left with a big fat zero. As an investor, we do not want to end up in such a predicament.
2. Some folks have been harping on why "Rights Issue" exercise is not conducted.
Under the Trust Deed of MUST, any unit-holders who exceeded the 9.8% holdings will have their units forfeited automatically and held by the Trustee of MUST, which will then proceed to sell the units. Manulife sponsor will end up with more than 9.8% units given that there are no external underwriter to take up the excess unsubscribed units.
3. "Why are there no external underwriter willing to take up the excess units?"
The reason is simply that given the high risk involve as earlier discussed in Point 1 above, no sane bankers will want to offer it as part of their risk management. So any calls for rights issue is just not feasible at this juncture and will be just a waste of time and additional expenses to be incurred to conduct the exercise. It is most likely doomed for failure in raising the required capital via this route.
4. Rights issue exercise once financials and operations stabilised.
The more opportune time for conducting right issue should be after the current rescue plan is approved so that MUST can cure the breach of banking covenant and to ensure the financials cum operations are eventually stabilised. This will give better visibility to external parties.
Parting thoughts
I am currently still vested in 9,900 units of MUST. Good luck and all the very best to all existing unit-holders! Who dare wins and may the force be with you.
(P.S: Pls see my previous post- "Devastating Recapitalisation Exercise for Manulife US REIT- Sponsor Raided Shareholders Via Loan-Shark Loan".)
The correct choice ( if investors do not want to end up with $0) is to vote FOR.
ReplyDeleteHi Leaver, fully agree......personally, I also think that immediate liquidation option has the worst probability of getting any recovery at this juncture.
DeleteAs said, Manulife US REIT could go for a renounceable, non underwritten rights issue of 1 right for 1 share with a large discount like 30% to price at $0.05. I am quite confident that such a large discount can yield a 100% subscription rate because unitholder will participate or encash their rights. If there are still shortfall in amount raised, then turn to sponsor. However, sponsor have stuck to their guns to stick to sponsor led and cited examples such as Ascott which is a failure because Ascott priced the rights at less than 10% discount.
ReplyDeleteThe take up rate of a rights issue is largely determined by the discount a company places.. Usually 30% discount can garner a 100% subscription and 1 for 1 rights with 100% subscirption will yield the needed effect of equity injection to take MUST below MAS's regulatory limits of 50% leverage effect
DeleteHi Choon Yuan, good day to you. I know that you are confident and optimistic that such a large discount will yield a 100% subscription and I do respect your creative thought process in an "alternative better solution".
DeleteNevertheless, the thing is that this is still a personal subjective view. Unless you can get a principle in approval in writings from all the 12 lenders, MUST Mgr and MUST sponsor that they are keen to do this as well as to do a personal banker's guarantee that it will work out, this is unfortunately not tenable at the current juncture.
The sheer efforts that MUST and its sponsor work to just to get the current rescue plan through and 12 lenders in agreement is in itself a miracle and pulling of strings at the highest level of management. I have also not seen the vocal Quarz Capital Management Ltd with the firepower coming out to present an alternative capital raising solution as part of their shareholder activism practice.