Redefine Properties initiates largest secured funding model in South Africa

Source: Supplied. Ntobeko Nyawo, chief financial officer of Redefine.

This transaction, the largest of its kind in the South African listed property sector, marks a significant shift in how Redefine manages its funding. The innovative structure, designed as an evergreen arrangement, has streamlined business processes and set a new benchmark within the sector.

Redefine previously entered into bilateral loan agreements with funders, who were each given a segregated pool of security with a portfolio of assets. These facilities have now been restructured to allow for all funders to participate in a common shared security pool, which is governed by a common terms agreement upon which all funders can base their terms.

The portfolio of assets that will be used as the common security pool, comprises 127 properties valued at R46.3bn, which represents 72% of Redefine’s direct South African property portfolio.

"By taking the assets that we believe are the core cash-generation backbone of our business for the foreseeable future and putting that on equal footing to all of our funders, we are leveraging the strength of our well-diversified investment portfolio, giving us flexibility to price our debt sustainably throughout market cycles," said Ntobeko Nyawo, chief financial officer of Redefine.

"Underlying flexibility agreements for the common security pool will give us the ability to maintain market-relevant commercial agreements."

Flexible security structure

Unlike other security structures of a similar nature, Redefine has chosen not to have a single clearing pricing point, giving the company the flexibility to manage concentration risk over time and throughout market cycles when refinancing maturities.

There are 11 funders including the big four SA banks and the typically large institutional investors in the secured lending space. However, the beauty of the structure is its evergreen nature without any lifetime limitations and will thus allow lenders to come and go over time seamlessly.

The new structure will govern Redefine’s lending going into the future with the terms agreed to applying to Redefine’s secured lending going forward.

“Essentially, the common security-pool structure will be the single-market access point for any lender to offer secured debt to Redefine, giving it the flexibility to supply debt on an end-to-end basis,” Nyawo explained.

A simplified, efficient channel for raising debt

The benefit for Redefine is to ease the operational administration of its funding arrangements as the new structure materially simplifies the ways in which the business brings in funders of secured debt due to referencing a single security pool while enabling a channel to secure that debt in an efficient manner.

“One of the key benefits of bringing funders into a singular, common collateral pool is that it will enhance Redefine’s secured debt market appetite,” Nyawo said. "By ringfencing the funding to a single lender, the bilateral funding left little room for competition."

As a consequence of the lending structure referencing a far more diversified security pool, funders gain cross-sector exposure that enhances their diversification, reducing concentration risk for lenders and thereby improving the credit profile.

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It also enables Redefine to effectively incorporate potential differentiated funders, such as a Development Finance Institution (DFI), into its secured funding mix, which it couldn't do with another lender's portfolio in the past.

Importantly, the structure is underpinned by a mechanism, which has been clearly defined and agreed to by the common-terms arrangement, that allows for the release of assets from this pool to support Redefine’s active asset-management strategy.

“Through this restructure, Redefine has created a sustainable, diversified funding model that reduces market shadowing of debt and enables the execution of strategic priorities, including the efficient sourcing of capital and diversifying our funding base,” Nyawo said.

Sourcing capital efficiently throughout market cycles

“Creating a sustainable funding vehicle is central to our business model,” he added. "Since our company primarily depends on gearing, it is essential that we source capital efficiently through market cycles, which we have accomplished with this transaction.

"When funding pools were dispersed in the past, Redefine was beholden to the incumbent lender’s risk and pricing considerations, rather than to market-clearing gearing and pricing.

"In contrast, a common security pool should better support our earnings over time when market cycles turn in our favour. Equally so, when the cycles turn against us, we will be much more adept at managing the challenges brought on by the rising cost of debt.”

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Nyawo said that the extensive collaboration with the 11 key funders was instrumental to concluding this transaction, which is the largest common security structure the market has ever seen.

“This extremely complex transaction was completed in less than six months, testament to the tremendous work and commitment of the team leads from our partner lenders and advisors. RMB was the mandated lead arranged for Redefine, and Webber Wentzel acted as lenders' counsel."

He added that the restructuring coincided with a time when the fundamentals required for listed property re-rating—such as the economic growth that the new government of national unity is targeting at 3.3%—are encouraging and resulting in increased confidence in the sector.

This, combined with the ability to raise capital efficiently, means Redefine is better positioned to fund both organic and inorganic growth opportunities, he said.

“We believe the common funding pool’s evergreen structure is fundamental to our long-term balance sheet management and truly supports our strategic ambition of building a simplified, diversified, cash-accretive listed property investment portfolio,” Nyawo concludes.