British Land convertible - what is it good for....?

British Land convertible: Today British Land has launched a £350m convertible bond offering, mainly to help pay for a site in Paddington (One Sheldon Square for £210m) and for Surrey Quays Leisure Park (£135m). The bonds are being issued out of a Jersey based subsidiary with a June 2020 maturity, a 20.0%-27.5% premium to the equity price and a 0.0%-0.5% coupon.

Now, British Land is focused on UK retail and London offices and is a doyen of the sector. However the world around is changing fast and whilst the London office market seems to be bubbly, I would be a bit wary about the prospects for retail property. In the long run, internet shopping will grow and grow. The over-spacing issues seen by the supermarkets could spread to other categories. The prospects for retail property may depend on the ability to recycle space into more leisure based uses or destination shopping for which the internet falls short. So I am not that keen on the equity at the moment.

But let’s say that you like the look of British Land. You can buy the equity for 864p, a modest premium to the last stated EPRA NAV of 829p (at 31^st March 2015). At this price the yield is a (modestly growing) 3.2%. The bonds issued today (when the pricing is set) will give you the right to buy equity by 2020 at a price of around 1035p to 1100p. In the meantime your coupon is between 0% and 0.5% (get the microscope out). To my mind no greek alphabet soup of deltas, volatility value or time value makes this optionality on the equity look great value. If you like British Land then buy the equity. If you don’t like British Land that much, then buy a ten-year gilt. Those that think this type of modern convertible is good value, just leave me scratching my head. All the upside on this deal looks to belong to British Land – clever people. (Neil Cumming^, 2^nd June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower