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Deloittes says Waltus scheme fair to all

By Chris Hutching

Friday 21st July 2000

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A Deloitte Corporate Finance report commissioned by independent Waltus directors says a proposal to merge 29 property syndicates into one company called Waltus Property Investments is fair to all investors.

The terms of reference of the report require Deloitte only to consider the fairness of the scheme to all investors.

Other issues such as the cost of Waltus' management fees or the outlook for the properties in the portfolio are not addressed.

The merger involves 46 properties valued at $231 million, most with leases that expire in the next couple of years.

Some of the loans on those properties have required interest-only payments so far but lending banks are refusing to extend the maturity date of loans and are demanding principal repayments.

To meet these repayments, distributions to investors would need to be suspended and there would be no reserves for capital expenditure or providing leasing incentives to tenants.

The main benefit of a consolidated property company is the ability to borrow funds at 0.5% cheaper than the cost of debt for individual syndicates, the Deloitte report says. Covenants would restrict gearing of more than 47%.

Waltus expects the borrowing ratio would be 42% in March 2006 based on the property portfolio increasing in value from $231.6 million as at August 31, 2000 to $242.9 million in March 2006.

Waltus has negotiated terms with a syndicate of banks for a new funding facility to refinance existing syndicate debt and provide for projected leasing incentives and other capital expenditure.

The new company will have greater borrowing capacity than the individual syndicates through cross collateralisation.

If the value of properties falls and the gearing covenant increases more than 45%, lenders have the right to suspend distributions to investors. Waltus said that if property values declined it would make selective property sales to remain within the gearing covenant.

The merger is aimed at maintaining steady distributions to all investors by taking advantage of the more diversified nature of one large underlying property portfolio when compared with that of individual syndicates.

Investors in Maine Properties Ltd, Hibank Properties Ltd and Carmont Properties Ltd hold first-mortgage securities over the property assets.

These investors will be exchanging their investment for shares and mandatory convertible notes in Waltus Property investments Ltd, which will own shares in the subsidiary companies, which own the property portfolio.

"This reduced security over the underlying property assets has been considered in the context of the increased reward for this additional risk which these investors would expect to receive in WPIL," Deloittes says.

Investors will vote on the proposal soon and it will proceed if 75% approve.

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