Fortifying Westfield
The decision to secure another $2.9 billion for the Westfield war chest in a period where further disruptions to local retail and property markets are expected speaks volumes about the group's take-no-chances approach.
Frank Lowy doesn't muck around. While the market was still debating whether or not Westfield Group needed to raise more equity, Lowy has locked in $2.9 billion of fresh capital with the underwritten placement announced this morning.
Even with $3 billion in write-downs announced last week Westfield was in reasonable condition. The $3 billion in equity it raised just ahead of the emerging global financial crisis looks prescient in hindsight.
While there was a lot of headroom between Westfield's current balance sheet ratios and its borrowing covenants, liquidity, while quite strong at $5.5 billion, was slowly shrinking and gearing was moving up.
Westfield had locked in $1 billion of new capital by organising the partial underwriting of its dividend reinvestment plan. The Lowys self-evidently decided $1 billion wasn't sufficient. By itself, that will be disconcerting for the institutional investors being asked to stump up the $2.9 billion today on the basis of the sketchy financial information released over the past week or so, just three weeks ahead of Westfield's full-year results announcement. Some apparently, aren't amused.
The group's gearing had risen from 33 per cent in June last year to 40 per cent at end-December and liquidity had fallen from $7.3 billion to $5.5 billion as a bulge in Westfield's pipeline of new projects continues to move through.
There was no immediate threat to Westfield's stability. Its self-imposed ceiling on gearing is 45 per cent and its banking covenants are triggered at 65 per cent – there was still a massive amount of headroom before Westfield needed to get anxious.
The fear and loathing in its sector and within the global banking sector, however, means that real conservatism is the only sensible strategy.
Westfield's core Australian market is holding up relatively well, although the major chains are experiencing sales declines and an update issued by Westfield today also shows that growth in specialty store sales, while still positive, is slowing steadily. Occupancy rates remain high and stable.
The situation in the US and UK is, not surprisingly, far bleaker and more threatening. In the US sales are declining at an accelerating rate and vacancy rates are rising sharply. A similar picture is emerging in the UK.
The overall picture is one of continuing and accelerating decline, which ought to be eventually reflected in sharply rising capitalisation rates and continuing and an increasing number of write-offs.
The $2.9 billion secured through the placement will lower Westfield's gearing by 400 basis points to 36 per cent, giving it a lot of insurance against the threat-laden conditions.
It may also give it something of a war chest to deploy if and when the Lowys are more comfortable that they have seen and weathered the worst of the conditions. The crisis is already ravaging the retail sectors in the US and UK and undermining the big shopping centre owners. The Australian business won't be immune – there has been a spate of collapses within the speciality retail sector even though conditions are far less hostile than in offshore markets.
If Westfield can contain the inevitable damage to its own balance sheet, at some point it will be presented with big and cheap opportunities.
Late last year Westfield bought a small but strategic stake in the reeling UK property trust, Liberty, which was widely seen as the Lowy's putting their foot on a future opportunity.
While the placement would give them the firepower to make acquisitions – Westfield said it would position the group for potential acquisitions – it would be a brave/foolhardy management that did anything major until conditions stabilised and the extent of the damage could be assessed.
Even with $3 billion in write-downs announced last week Westfield was in reasonable condition. The $3 billion in equity it raised just ahead of the emerging global financial crisis looks prescient in hindsight.
While there was a lot of headroom between Westfield's current balance sheet ratios and its borrowing covenants, liquidity, while quite strong at $5.5 billion, was slowly shrinking and gearing was moving up.
Westfield had locked in $1 billion of new capital by organising the partial underwriting of its dividend reinvestment plan. The Lowys self-evidently decided $1 billion wasn't sufficient. By itself, that will be disconcerting for the institutional investors being asked to stump up the $2.9 billion today on the basis of the sketchy financial information released over the past week or so, just three weeks ahead of Westfield's full-year results announcement. Some apparently, aren't amused.
The group's gearing had risen from 33 per cent in June last year to 40 per cent at end-December and liquidity had fallen from $7.3 billion to $5.5 billion as a bulge in Westfield's pipeline of new projects continues to move through.
There was no immediate threat to Westfield's stability. Its self-imposed ceiling on gearing is 45 per cent and its banking covenants are triggered at 65 per cent – there was still a massive amount of headroom before Westfield needed to get anxious.
The fear and loathing in its sector and within the global banking sector, however, means that real conservatism is the only sensible strategy.
Westfield's core Australian market is holding up relatively well, although the major chains are experiencing sales declines and an update issued by Westfield today also shows that growth in specialty store sales, while still positive, is slowing steadily. Occupancy rates remain high and stable.
The situation in the US and UK is, not surprisingly, far bleaker and more threatening. In the US sales are declining at an accelerating rate and vacancy rates are rising sharply. A similar picture is emerging in the UK.
The overall picture is one of continuing and accelerating decline, which ought to be eventually reflected in sharply rising capitalisation rates and continuing and an increasing number of write-offs.
The $2.9 billion secured through the placement will lower Westfield's gearing by 400 basis points to 36 per cent, giving it a lot of insurance against the threat-laden conditions.
It may also give it something of a war chest to deploy if and when the Lowys are more comfortable that they have seen and weathered the worst of the conditions. The crisis is already ravaging the retail sectors in the US and UK and undermining the big shopping centre owners. The Australian business won't be immune – there has been a spate of collapses within the speciality retail sector even though conditions are far less hostile than in offshore markets.
If Westfield can contain the inevitable damage to its own balance sheet, at some point it will be presented with big and cheap opportunities.
Late last year Westfield bought a small but strategic stake in the reeling UK property trust, Liberty, which was widely seen as the Lowy's putting their foot on a future opportunity.
While the placement would give them the firepower to make acquisitions – Westfield said it would position the group for potential acquisitions – it would be a brave/foolhardy management that did anything major until conditions stabilised and the extent of the damage could be assessed.
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