MMP321 Lecture Notes - Lecture 6: Institutional Investor, Hybrid Security, Seasoned Equity Offering

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31 May 2021
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MMP321 Topic 6 Seminar Solutions
1
Topic 6: Raising Capital for Property Investment
Question 1:
Define and describe the terms ‘fixed charge’ and ‘floating charge’ in relation to
security on a bank loan.
SOLUTION:
Fixed charge loan is secured against an individual property
Floating charge loan secured against a pool of properties
Question 2:
What is a ‘negative pledge’ clause? Why would an investor want such a clause in a
property trust bond?
SOLUTION:
A negative pledge clause is a covenant in a debt contract that restricts the borrower
from taking out further loans without approval by the original lender. Lenders use
this as a form of protection of the assets of the borrower in case of default.
Question 3:
When rating agencies assess a Commercial Mortgage Backed Security (CMBS), what
is the major determinant of their credit rating?
SOLUTION:
The ratings by credit agencies are based on the underlying properties in the CMBS,
not the property fund themselves.
Question 4:
What is a BAB? How is the interest cost determined?
SOLUTION:
BAB Banks Accepted Bill is a short-term debt security issued by a trust (or
company) that is guaranteed by a bank. They typically have 90 or 180 maturities.
BABs are issued at a discount to their face value. The difference between the issue
value and face value is the interest cost.
Question 5:
Describe the characteristics of a convertible debt security.
SOLUTION:
A convertible debt security is a hybrid security. The security is issued by a trust or
company. Similar to a regular (plain vanilla) bond, the bonds pays fixed coupons
(interest) for a set period (generally around 5 years).
However, unlike a regular bond, the security can be converted into ordinary equity
in the trust or company. The conversion price is determined by a formula set in the
contract at the beginning.
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MMP321 Topic 6 Seminar Solutions
Question 6:
Investment banks are often employed to act as an underwriter in a capital raising.
What is the role of the underwriter and what is the fee structure?
SOLUTION:
The role of an underwriter is to assist a trust or company in the sale of financial
securities. The underwriter will use their relationships with investors to help sell
the securities, they will also advertise the offering to retail investors.
The underwriter fees are derived from the spread between the price units are sold
to investors and the price the investment bank pays the fund.
Question 7:
When a property fund decides to list on an exchange it called an initial public
offering (IPO). List three reasons a fund would want to list?
SOLUTION:
Reasons to IPO include:
To buy new or refurbish existing properties
To expand into a new markets
To repay debts and change their capital structure
As an "exit strategy" for the owner or original investors
Question 8:
With any IPO a prospectus needs to be prepared. What must the prospectus contain
and what is the aim of the prospectus?
SOLUTION:
Prospectuses must contain:
information on the features of the securities being offered,
how many are for sale and subscription price,
how you can apply to buy them,
information on the fund, its operations & financial position,
What they propose to do with the funds,
the risks associated with the offer.
The aim of a prospectus is so a retail investor can make an informed decision about
whether or not to invest.
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