Workspace Group (WKP) has become the latest property company to announce plans for a retail bond. It plans to pay a coupon of 6 per cent on a bond maturing in October 2019. The securities will not be guaranteed by any specific properties, but the company has laid down two covenants: it has pledged to keep its net debt within 75 per cent of the gross value of its portfolio and its net rental income in excess of 1.5 times its debt-interest payments.
The bond looks a good deal for investors. The coupon is more generous than the 5.375 per cent available from Primary Health Properties (PHP) and the 5.5 per cent from CLS Holdings (CLI) - the other two property issues of the summer. Workspace's protection from covenants is also stronger than PHP's (though PHP's bonds still look attractive, and are trading above par, because the company's cash flows are backed by the NHS). "We wanted the bonds to trade well in the after market," says Workspace finance director Graham Clemett. "We don't want this to be a one-off".
The issue looks less attractive for Workspace shareholders, as it pushes the group's cost of debt up from 5.1 to 5.2 per cent. Insurers have been lending to property companies at much lower rates. For example, Legal & General lent £121m to Unite Group for 10 years at 5.05 per cent in May. But Mr Clemett says the retail bond has other advantages. First, it gives Workspace more flexibility - the loan is subject to covenants but is still unsecured, unlike most insurer loans. Second, he hopes it will raise awareness of Workspace in the wider investor community, possibly helping to narrow the discount at which the ordinary shares trade.
