Inside LondonMetric’s £380m private placement deal

On 25 March, UK REIT LondonMetric Property announced it had priced a £380 million (€443 million) private debt placement with 11 North American and UK institutional investors.

Of the 11 institutions, five had invested in previous bonds issued by the company, while six were new investors. According to Martin McGann, finance director of LondonMetric, demand was so high that it led the firm to more than double the size of the placement from its initial £150 million target. “The appetite for this issue was really strong and we are very satisfied with the expansion of our lending base,” he told Real Estate Capital.

The fact that the placement is the third issued by the UK property company to date, partly explains investor demand, said McGann. “The market is supportive of follow-on issuers, so we were able to talk to existing and new investors,” he said. “We originally went to the US PP market because we thought that was a great way to diversify our lender base. For unsecured debt, the pool of money in North America is potentially deeper than in the UK.”

LondonMetric launched its first private debt placement in September 2016. The company, which focuses on logistics investments, launched its second issue in December 2018. According to the firm’s annual report for 2020, private placements make up 29 percent of the company’s drawn debt.

In a statement announcing the deal, the company said it had entered into the placement at a blended fixed-rate coupon of 2.27 percent and a weighted average maturity of 11.1 years. It added the notes had been placed with the North American and UK investors in four tranches: £135 million on a seven-year term at a coupon of 2.06 percent; £135 million on a 12-year term at a coupon of 2.34 percent; £60 million on a 15-year term at a coupon of 2.45 percent; and a final £50 million ‘green’ tranche, also on a 15-year term, at a coupon of 2.43 percent.

The deal, McGann said, is part of an overall refinancing strategy of the company’s revolving credit facilities. Part of the credit facilities will be replaced by the placement, while others will be replaced by new revolving credit facilities the company is close to securing. “We have a £444 million RCF that expires in April 2022, so a large part of the proceeds will be allocated to its refinancing,” he said. “We are also refinancing another two unsecured facilities. The new RCFs are being agreed and I expect to have completed them by the end of April.”

While most of the proceeds will be used to refinance existing debt facilities, some of the placement’s tranches will be used to fund specific projects. This is the case with the £50 million tranche, which is subject to a ‘green framework’, under which spend will be allocated to buildings with high sustainability standards.

“The proceeds of the £50 million green tranche will be deployed in our two major logistics developments in Bedford and Birmingham, which are currently under construction to BREEAM ‘excellent’ standard,” said McGann. “The green component of the placement is an attractive financing proposition for us as the sustainability of our buildings is becoming increasingly important for us and our investors.”

McGann added: “The green notes are priced 2bps inside the equivalent non-green 15-year tranche and represents the first tranche of its kind announced by a UK REIT.”

Long maturities

Private placements provide longer maturities than typical bank financing arrangements, which makes them ideal for companies seeking to extend or layer their refinancing obligations out beyond the typical three-to-five-year bank tenor. This, alongside the company’s aim to diversify its capital sources, was a key reason behind its decision to choose a private placement as a method of raising new finance, McGann told Real Estate Capital.

“We have to make sure the balance between our fixed coupon debt and our revolving credit debt provides us with the flexibility we need since, as a company, we are very actively involved in the management of our asset base,” said McGann. “This financing provides us with long-term debt and at the moment it is attractively priced.”

At the time of writing, the transaction had not been closed, meaning pricing could change. The placement closing is expected to occur by the end of April.

McGann said he believes investors had priced the placement at an attractive blended margin of 2.27 percent for a mix of seven, 12 and 15-year debt, with margins more attractively priced for the shorter-term debt. He added that raising the capital through revolving credit facilities would have provided LondonMetric with tighter margins, but for shorter periods. “It is a trade-off between the debt’s length and its price,” he explained.

“For 12-year money, we are paying 2.34 percent and for 15-year money, we are paying 11 bps more. I think that is reasonable value now.”