Pallas Capital pioneers high-yield bond issue backed by loans against premium Australian commercial property

Pallas Capital, a specialist Australian commercial real estate investment management firm, has this month launched a tradeable wholesale bond issue, providing an innovative way for investors to earn a high yield underpinned by a diversified portfolio of commercial real estate debt assets. 

Pallas Capital’s fund is offering investors a 7.5% p.a. yield, payable quarterly in arrears, over a four-year term. The funds raised by the bond issue will be invested in a mortgage loan ‘warehouse’ facility comprising registered first mortgage loans secured over premium, inner-city Sydney and Melbourne land, investment and development assets, with a maximum loan to value ratio of 65 per cent. 

Pallas Capital, via its lead manager the Australian Bond Exchange, is seeking to raise $30 million in the first tranche, with the capacity to raise up to $100 million. Strong interest is expected from high net worth individuals, family offices, wealth advisers and institutional investors. 

Investors are protected by a ‘first loss investment protection’ mechanism, equivalent to 5% of the aggregate amount invested in the issued bonds. This amount is held as a reserve to be drawn upon by Pallas Capital if needed in order to meet its financial obligations to noteholders. Pallas Capital has never had a default on any loan arranged by it. 

Craig Bannister, Pallas Capital’s Executive Director – Distribution said the transparency, protections and liquidity offered to noteholders by Pallas Capital set it apart from what is currently available to investors in the asset class. 

“Non-bank lending will continue to grow; secured investment in commercial real estate debt is still a new asset class in Australia, but well established in more mature financial markets overseas, such as Europe and North America. The structural dislocation of global and domestic credit markets during the GFC and more recently COVID-19, together with APRA’s increasing regulation of the big four banks, continues to provide a significant non-bank lending and mispricing opportunity and lends itself to private capital participation on favourable terms. 

“With interest rates at record lows, Pallas Capital is aiming to remove as many barriers as possible for private investors wishing to participate in a diversified portfolio of registered first mortgage loans that provide attractive risk-adjusted returns and income yields. 

“Our Australian-first move to issue this type of investment through the Australian Bond Exchange brings the additional peace of mind of settlement through Austraclear and improved liquidity through secondary trading via the connectivity between the Australian Bond Exchange and the IRESS trading platform. We are also able to offer noteholders superior transparency through real-time prices and data on the security,” Mr Bannister said. 

Mark Spring, Executive Director of Pallas Capital, said that Pallas Capital takes a meticulous approach to analysing each property loan opportunity, underpinned by the executive teams’ 150 years of combined experience in structuring and managing loans. 

“Pallas Capital’s success has been built on the simple fact that the provision of finance to experienced developers, secured against well-located assets, remains undersupplied. We are proud of the developments we have helped bring to market in suburbs like South Yarra and Toorak in Melbourne, and Double Bay and Rose Bay in Sydney, and we will continue to focus on lending to high-end, boutique developments,” he said. 

Pallas Capital has a strong track record as a specialist commercial real estate financier and investment manager. In recent years it has provided funding in excess of $450 million, across 79 debt and equity transactions. It has incurred no defaults on any transaction. 

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