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Australia Property Firms May Seek Hedge Fund Cash

Date: Thursday, February 18, 2010
Author: Sarah McDonald, Bloomberg

Australian unlisted property companies, facing a funding gap as banks cut back on loans, may turn to alternative investors such as hedge funds as they seek to repay maturing debt, according to Nomura Holdings Inc.

Lenders including Westpac Banking Corp., the nation’s second-biggest, reduced commercial mortgages amid the worst global recession since World War II. Leda Holdings, a privately- held Australian real estate developer, hasn’t been able to obtain loans from banks to repay A$300 million ($269 million) of commercial mortgage-backed bonds due next week, it said Feb. 16.

“Property companies with high leverage ratios may need to seek alternative sources of funds where bank lending limits don’t cover full refinancing needs,” said Ben Byrne, credit analyst at Nomura’s Australia unit in Sydney. “Many will have to contemplate mezzanine loans to fill the gap.”

Property firms including Westfield Group and Stockland, ravaged by losses and writedowns after real estate prices in the U.S. collapsed, led A$120 billion of equity sales to repair balance sheets. Unlisted property firms, which can’t tap the stock market, face greater refinancing challenges as banks demand lower debt levels in the wake of the financial crisis.

“Lending conditions for the commercial property sector remain very tight,” the Reserve Bank of Australia said in a Feb. 4 monetary policy statement.

Westpac Loans

Commercial property lending makes up less than 10 percent of Westpac’s gross loans, down from 13 percent a year ago, the Sydney-based bank said Feb. 16. when announcing its quarterly profit.

Real-estate developers and companies in Australia, China, and Indonesia will provide the most opportunities for Asia- Pacific distressed debt investors as their refinancing burden grows, according to an industry survey in December. Some 68 percent of respondents said debt refinancing will be the most likely source of distressed products next year, according to the poll published by Debtwire.

Investment bank SC Lowy Financial Services and private- equity fund Oaktree Capital Management LLC have expressed interest in buying commercial property assets in Australia.

Sydney-based Leda’s bonds were backed by interests in five retail shopping centers located in Queensland state and the Australian Capital Territory, according to a Standard & Poor’s report written when the notes were offered for sale in 2006.

Possible Downgrade

The ratings firm said today it may downgrade the notes, the main class of which is rated AAA.

Leda spokesman Colin Allerdice declined to comment yesterday when asked if the company was talking to hedge funds.

Mezzanine loans rank after other debt in the event of a default. They typically attract an increased interest rate, making them popular with investors such as hedge funds that seek higher returns.

Leda in February 2006 paid a spread of 17 basis points on the main class of notes, according to data compiled by Bloomberg. Macquarie Countrywide Trust, a listed real estate investment trust, paid a 410 basis point margin when it issued debt worth A$265 million in September to refinance maturing mortgage notes, the data show. A basis point is 0.01 percentage point.

Spreads, which last year declined from levels at the height of the credit crunch, may increase again, compounding the effect of benchmark interest rate rises on the total cost of debt for companies, according to Atul Lele, Sydney-based equity strategist at Credit Suisse Group AG. “None of that is positive for commercial property asset values.”

Real Estate Prices

Real estate prices from hotels to retirement homes may be constrained as investors won’t be able to borrow the same levels of debt that were available before the financial crisis, Bill Moss, former head of property at Macquarie Group Ltd., said this month.

It’s still not clear how Australia’s smaller businesses, such as suburban retailers and offices, will fare in the next 18 months as the economy recovers, said Moss, now the chairman of advisory and funds management firm Moss Capital.

Colonial First State, Australia’s biggest asset manager, said Feb. 16 it will unwind an A$850 million mortgage-income fund because provisions for bad loans prevent any investor payouts for 18 months. The fund invests mostly in commercial mortgages.

The 16 members of the S&P/ASX 200 A-REIT Index reported combined losses of A$19.5 billion and writedowns of A$21.7 billion in the year to June 30, according to data compiled by Bloomberg. That index has declined 5.4 percent this year.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.