This week Australian Bond Exchange (ABE) launched a new high yield bond issue on behalf of Pallas Capital.
ABE is lead manager of the transaction and will make the bond available through the digital IRESS platform, meaning there will be real time prices and data on the security, a first.
Hoping to raise $30 million, with the capacity to raise $100 million, the bond will have a 7.5% fixed rate yield and a four year term.
Pallas has run a number of mortgage funds and proceeds of the bond will be used to help fund and develop a range of projects that are predominantly located on the east coast of Australia. It is expected 70% will be based in NSW and Victoria.
Investments can include construction, land and investment. Security will comprise:
- First mortgages over the properties
- Company guarantees from the developer
- Personal guarantees
About Pallas Capital
Established in 2016, Pallas specialises in the provision of structured debt and equity products to Australian real estate owners and developers and employs 16 dedicated real estate professionals across its Sydney and Melbourne offices.
Developments are predominantly in the eastern suburbs of Sydney and Melbourne and in terms of residential property they target the luxury downsizer market.
Pallas has a sound track record providing in excess of A$415m total investments since inception across 73 debt and equity transactions (55 debt) and a range of real estate sectors with in excess of $260 million in single asset and diversified trusts, as at 30 September 2020. Of the 73 transactions, 39 are first mortgages that have delivered an average net return of 9.4% pa. There has not been any defaults or impairments on any of its projects.
First Loss Capital Protection
Like RMBS that have an equity tranche, the Pallas Capital bond also has investor protection with 5% of the total outstanding bond value set aside to cover any loss on the investment.
|Type:||Fixed Rate Note|
|Size:||Up to A$100m with first tranche of A$30m|
|Coupon:||7.5% p.a. Fixed|
|Security:||Registered first mortgages over Australian commercial real estate|
There are other covenants included in the bond, which you can read about in the Information Memorandum.
Private Debt Risks
Illiquidity is one of the major risks, along with credit risk, that is the borrower/ developer cannot meet interest and principal repayments when due. In this transaction, the bond is tradeable in $10,000 lots on the IRESS platform, enabling holders to sell, possibly providing liquidity.
Another risk to consider in this sector is concentration risk. Many transactions involve just one particular investment or development so if something goes wrong, investors can pay a high penalty. A fund that invests in multiple projects offers some diversification and reduces risk. However, the investment decision is taken away from investors and placed with the manager.
In construction projects, much of the risk is when the building is being developed. Loan to valuation ratios typically assume an ‘as complete’ valuation.
How To Invest
Investors interested in the deal can contact Australian Bond Exchange direct or ask their financial adviser who can transact using the IRESS platform.