PAYCE Consolidated Limited (PAYCE) announced to the ASX on 29 October 2015 that it has “entered into documentation to joint venture with Mirvac Group in the East Village retail and commercial centre”
Completion of the transaction remains subject to certain conditions which are expected to be satisfied in the second half of calendar 2016. One of these conditions is assumed to be the early call of the PAYCE 9.5% bond on 3 December 2016 for $102.
Under the terms of the bond, PAYCE is not permitted to sell the East Village asset (with the bond having security over East Village) until the first call date and then only if the proceeds are used to repay bondholders.
It is considered highly likely that the PAYCE 9.5% bond will be called on 3 December 2016 (for $102 early call price) and the joint venture transaction can then be completed at that time. However, investors should note that the transaction is subject to certain conditions which are unknown so it is possible that the transaction does not ultimately proceed.
Consideration for the Mirvac stake has been set at $154.7m which would value the East Village retail and commercial centre at circa $310m. This asset was valued at $235m in the PAYCE accounts as at 30 June 2015.
Investors may recall that PAYCE cannot leverage East Village by more than 70% of its value (including the $50m bond issue) until December 2016 and 60% thereafter, ensuring significant residual value exists for bondholders after the senior secured bank debt. As at 30 June 2015 it was calculated that the maximum senior secured bank debt was $114.5m. Applying a revised valuation of circa $310m this would imply $195.5m in residual value.
This announcement is very positive for bondholders as it significantly increases the assigned value to the East Village asset and hence residual security value for the bonds. This development also means that it is highly likely that the PAYCE 9.5% bond will be called at first opportunity on 3 December next year.
Whilst the joint venture transaction is subject to certain conditions and is not expected to be completed until late 2016, we view the likelihood of it not proceeding as relatively small and take comfort from the Mirvac Group name. Given the very strong security position and likely call at $102 on 3 December 2016, the bonds represent value down to a yield to call of low-to-mid 4%.
View the ASX announcement
Please contact your FIIG representative for more information.