CLS is the latest property company after Primary Health Properties to try to convince retail investors to buy a single company bond and Investors Chronicle got first sight of the details at the bond's launch. For income seekers, it looks promising - with a yield at launch of 5.5 per cent.
- Decent yield
- CLS has launched an identical bond
- Sound balance sheet
- Avoided worst of property slump
- Effective exposure to euro
- Interest rate and inflation risk
The company owns high-yielding commercial property in the UK, Germany, Sweden and France and its bosses are looking to diversify its funding. Given the demand for any sort of yield, it should attract interest for a bond sale mooted at the £50m mark. The bookbuilding process means the company is cagey about announcing the bond's coupon (the dividend). However, it was never likely to stray far from the yield of a bond that CLS issued in Sweden.
The basic approach to assessing the bond is similar to assessing the value of CLS's shares, which we suggested buying at 670p (22 June 2012). The difference is that bondholders' returns are defined upfront. So the question is whether CLS can generate enough cash to pay the coupon and eventually to pay back the debt.
For starters, the balance sheet must be in decent shape. Currently, CLS's net debt is quite high, but its loan-to-value ratio stands at just 56 per cent; shareholders' funds are close to £380m and cash resources come in at £123m. That equates to sound financing, which partly stems from the decision taken in 2006 to sell properties amid signs of the market overheating. Consequently, CLS avoided the worst of the downturn by selling 40 per cent of its portfolio at peak prices.
CLS 5.5% BOND 2019 | |||
| Price | See text | Yield | See text |
| Maturity | 7-10 years | Minimum application | £2,000 |
| Coupon | Not decided | Credit rating | na |
| Payment | Semi-annual | Issue size | circa £50m |
| Sipp & Isa eligible | Yes | Listed on LSE | Yes |
The company's existing capital structure is heavily weighted towards bank debt, with a syndicate of 19 banks holding the debt, along with the Swedish retail bond. The company's average interest rate is 3.74 per cent and payments are covered 3.4 times by earnings. The rent roll on £900m of property is £66.5m. In relation to the underlying assets, the bond will count as senior debt, so it ranks ahead of equity but is unsecured against the company's buildings, which are held as security for bank debt.
CLS's bosses have shaped the UK bond as a "mirror image" of the Swedish retail bond. That indicated that the issue price and coupon would initially generate a yield between 5.5 per cent and 6 per cent. But the UK bond differs from its Swedish counterpart in one significant respect - its coupon is fixed (at 5.5 per cent, paid in semi-annual amounts), whereas the Swedish bond will most likely fall. That won't matter for investors who plan to hold the asset until maturity. Their risks will be those of exposure to inflation, default by the borrower and, in effect, exposure to the euro and Swedish krona via CLS's property assets.
However, investors will be able to take the income tax-free because the bond will be eligible for inclusion in an individual savings account (subject, of course, to the usual Isa constraints).
