St Modwen (SMP) has become the latest property company to launch a retail bond, allowing it to raise finance directly from small private investors too risk-averse to consider its shares. The proposed bond comes with a coupon of 6.25 per cent - the highest yet in the sector.
Finance director Michael Dunn says he wants to reduce the company's reliance on banks rather than raise its debt levels, which are currently 74 per cent of net assets. The bond will therefore replace old bank loans, not pay for more property. The 6.25 per cent interest rate to bondholders will increase St Modwen's cost of finance slightly, but that's offset by the advantages of flexibility - like all retail bonds, these are not secured against specific assets - and a longer maturity. Whereas most banks lend for at most five years, these retail bonds are not due until 2019.
Private investors have digested a flurry of similar bond launches since July. In the property sector, these have followed a rapid trajectory up the risk-reward curve. First out of the blocks was Primary Health Properties (PHP), which lets doctors' surgeries to the NHS, with a 5.375 per cent coupon; then came a bond yielding 5.5 per cent from CLS Holdings (CLI), an office landlord with many public-sector tenants; finally Workspace (WKP), which lets space to entrepreneurs and white-van men on three-year leases, issued a 6 per cent bond this month.
St Modwen's offering is higher yielding again because the company is more developer than landlord. It does own a substantial portfolio of income-generating properties, perhaps the most famous of which is the affectionately reviled 1960s shopping centre at Elephant & Castle in London. The income from these covers the company's basic costs, including debt interest payments. But St Modwen makes its profits by redeveloping sites, particularly for residential construction. This year its shares, which we have long recommended buying, have been billowed up 73 per cent by the same wind as has swept up the housebuilders.
