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18 July, 2017
In recent years, there have been several proposed buyout deals involving REITs and Business Trusts, the most recent being the proposed privatisation exercise by Croesus Retail Trust (CRT). Such buyouts typically involve either the purchase of all the units of the trust (as was the case for CRT), or the purchase of all the assets of the trust.1
This note focuses on the financing of the acquisition of units of a REIT or Business trust, and discusses the main acquisition structures and points that a potential lender may wish to consider when funding such a takeover.
The Acquisition Structures
General Offer
The Singapore Code on Take-overs and Mergers (“the Code”) provides that the units of a REIT or Business Trust (as the case may be) may be acquired by way of a general offer.2
The process is similar to a general offer for shares in a company. It usually starts with the offeror making a public announcement of the offer, followed by the offeror issuing an offer document to the target REIT or Business Trust (as the case may be). After reviewing the offer documents, the relevant manager or trustee-manger would have to circulate an offeree circular containing independent advice to the unitholders of the target REIT or Business Trust (as the case may be), and the unitholders would have a window period to decide whether they would want to accept the offer.
Trust Scheme
The second acquisition structure which the Code provides for is the trust scheme.3 In terms of structure and documentation, the trust scheme is very similar to a scheme of arrangement under the Companies Act.
The trust scheme will require an implementation agreement which will set out the terms and conditions on which the trust scheme will be implemented, and a supplemental trust deed to amend the constitutional documents of the REIT or Business Trust (as the case may be) so as to grant the manager or trustee-manager (as the case may be) the necessary powers to implement the trust scheme.
In terms of internal approvals, a scheme meeting would need to be convened to obtain the approval of the unitholders to amend the constitutional documents of the REIT or Business Trust (as the case may be), as well as to obtain the approval of the unitholders to approve the trust scheme.
In addition to these internal approvals, the trust scheme will need to be sanctioned by the Court under Order 80 of the Rules of Court, Chapter 322, R 5 of Singapore. This is because certain provisions of the Code would need to be waived to facilitate a merger or privatisation via a trust scheme, and the Securities Industry Council would, among other conditions, only grant such waivers if court sanction of the trust scheme has been obtained.
How do the Different Acquisition Structures Affect the Lender?
There are a number of potential issues that lenders should consider before extending a bridging loan to an offeror for the purpose of acquiring the units of a REIT or Business Trust (as the case may be).
Minority Interests
Where a general offer structure is adopted, and the offeror does not manage to acquire all the units of the target REIT or Business Trust (as the case may be), there may be a need to consider the interests of the minority unitholders. This is particularly so if the debt is intended to be pushed down from the offeror to the trust level or if the trust is to provide upstream security for the acquisition, since dissenting unitholders may be able to prevent the trustee from borrowing or providing security.
Existing Indebtedness
Where the target REIT or Business Trust (as the case may be) has outstanding debt issuances, the restrictive covenants applicable to those issuances, and the interests of the bondholders, would also have to be considered. Debt instruments which are not fully redeemed may need to be modified post-acquisition, with the consent of the relevant bondholders.
The target REIT or Business Trust (as the case may be) may also have taken out prior financing with other lenders. Similarly, these documents may contain change of control restrictions, triggering defaults or mandatory prepayments, and as such any financing must be timed such that the existing debt is repaid or refinanced on the completion date.
Sufficient Resources
Lenders should also note that an offeror will typically need to show the target REIT or Business Trust (as the case may be) that it has the necessary financial resources to complete the acquisition. The Code requires that for general offers, the offer document shall include an unconditional confirmation from the offeror’s banker (or other appropriate third party, such as a financial adviser) that sufficient resources are available to the offeror to satisfy full acceptance of the offer. Accordingly, the terms of the loan documents would need to provide for certainty of funding, such that in the absence of any major default or misrepresentation, the lender is obliged to fund the acquisition where all conditions precedent are met.
Where a lender is required to provide a financial resources confirmation, it should always seek legal advice on the terms of the confirmation and the certain funds clauses in its documentation.
Financial Assistance and Other Restrictions on Security
As with any acquisition loan, there may be potential financial assistance and commercial benefit issues, particularly where security is sought from the target REIT or Business Trust (as the case may be) or the debt is pushed down to the target REIT or Business Trust (as the case may be).
While there have been recent changes to the Companies Act to narrow the scope of the financial assistance prohibition, and the prohibition on financial assistance is found in the Companies Act, and not specifically in the legislation pertaining to REITs or Business Trusts, issues of financial assistance and commercial benefit may still be relevant in the context of acquisition financings of trusts in certain circumstances.
Where the trust involved has subsidiaries incorporated outside Singapore and these subsidiaries provide collateral support for the acquisition loans, then issues of financial assistance, commercial benefit and other local law security and guarantee restrictions would still be relevant.
1 The disposal of assets by Saizen REIT is an example of an asset acquisition of a trust. On 4 March 2016, Saizen REIT completed the disposal of its entire portfolio of real estate assets in Japan to Triangle TMK.
2 As of the date of this note, there has not been any takeover of a trust via a general offer in Singapore.
3 As of the date of this note, there has not been any takeover of a trust via a trust scheme in Singapore. On 28 June 2017, Croesus Retail Trust announced that it is undergoing a proposed privatisation exercise by way of a trust scheme.
