The business trust structure was introduced in Singapore in 2004 as a means of increasing the profile of Singapore’s stock exchange, the SGX, and attracting players in sectors such as shipping. The structure has had limited success, with SGX-listed business trusts performing poorly and relatively little investor interest.
The structure received an unexpected boost, however, with the high profile $5.5 billion spin off by Hutchison Whampoa of its ports assets into a business trust known as HPH Trust, which was listed on the SGX earlier this year. Then, last month, the Hong Kong-listed telecom and property company PCCW divested its telecom assets in a similar structure on the Hong Kong Stock Exchange (HKSE).
What is a trust?
In a Singapore business trust structure, the assets of the business are held beneath a trust rather than a single holding company. Investors hold units in the trust rather than shares, and are therefore the beneficial owners of the assets. Like its cousin, the real estate investment trust (REIT), the business trust does not have a separate legal personality and acts through a trustee manager, which manages the operations of the business trust.
The key advantage of a business trust is that it has far greater flexibility to make distributions: the business trust can pay distributions to unitholders out of available cashflows, unlike companies, which generally can only declare dividends out of accounting profits or other distributable reserves. Accordingly, the business trust is an appropriate structure for stable cash-generative assets (like telecom assets in mature markets) where investors expect an income yield rather than capital growth.
The PCCW example
Hutchison Whampoa choosing Singapore, rather than Hong Kong, as the venue to list its Hong Kong and Chinese port assets led to a feeling that the Singapore market had “stolen a march” on Hong Kong. The HKSE reacted by signaling its willingness to sanction a similar structure.