New World Development has decided to defer coupon payments on four US dollar perpetual notes, raising further concerns over the Hong Kong property company's liquidity as it tries to complete a crucial loan refinancing.
The four perps are a US$700m 4.8% note, a US$1.2bn 4.125% note, a US$345m 6.15% note and a US$1bn 5.25% note. The next coupon payment dates are June 9, 10, 16 and 22.
The deferral does not trigger default as NWD is allowed to do so if it has not paid dividends to shareholders or any payment on junior or parity debt three months before. No such payments can be made until all accumulated interest is paid, preventing it from redeeming the 6.15% perp on its first call date of June 16, when the coupon will reset with a 300bp step-up to around 10%.
NWD did not pay a dividend for the year ended June 30 2024, and in February this year said it would not pay an interim dividend after making a HK$6.6bn (US$841m) loss in the six months ended December 31.
The 6.15% perp dropped 34.8 points following the announcements to trade at a cash price of 20 on Monday, but recovered some losses to trade at 32.60 on Friday, according to LSEG data. The other three bonds lost four to15 points on Monday to trade at 19.50, 19.25 and 19.75 before the latter two returned to 20.80 and 23.10 on Friday.
NWD also has a US$1.3bn 6.25% fixed-for-life perp outstanding with its next coupon payment in September. The interest payment on that note is expected to be deferred as well because of the payment restrictions.
That perp also lost six points and was trading around 20 during the week. The developer's US dollar dated bonds dropped three to nine points, according to LSEG data.
Lucror analysts called NWD's decision "disappointing" and said it may raise concerns over the company's liquidity situation and its willingness to pay, which will affect its future return to the dollar bond market. But they wrote the coupon deferral, which will conserve US$249m of cash per year, is positive for senior dated bonds.
Speculation reemerged that NWD might embark on a liability management exercise. CreditSights analysts wrote in a note on Monday that they expect the developer to offer upfront cash, make payment-in-kind and delay step-up dates by three to five years in a restructuring, which they said could include both perps and dated bonds.
“While it is hard to predict the terms of the LME, we do not expect the recoveries to be worse than the current prices,” they wrote.
Nomura analysts estimated that the recovery ratio for the dollar bonds will be below 30 cents in the dollar if the secured loan deal is done.
The company was rumoured in January to have hired legal and financial advisers for a restructuring, which it denied.
Loan progress
The coupon deferral does not affect NWD's loan refinancing process. The company has garnered more support from bank lenders, obtaining commitments of more than HK$50bn from over 20 banks for two loans totalling HK$87.4bn that will replace existing bank debt with a covenant waiver expiring in June.
Among the banks that have committed to the two refinancings are Bank of China, DBS Bank and HSBC – the three contact banks of the deals.
Other lenders are still processing internal approvals for joining the borrowings comprising a HK$63.4bn loan that will replace debt maturing by 2026 and a HK$24bn financing to refinance other facilities coming due in 2027 and beyond.
NWD is offering security packages that contain around 40 of the group’s properties, valued at a combined HK$150.5bn, according to a term-sheet sent out in February, to attract banks to join the two new three-year borrowings, as most of its existing loans are unsecured.
NWD is under pressure to complete the HK$87.4bn refinancing by the end of June because its lenders earlier agreed to amend a financial covenant that exists in most of its bank borrowings – which would have been breached without the amendment – but the consent is only valid until the end of June.
Most of NWD’s bank borrowings and loans that it guarantees carry a covenant that stipulates a maximum net debt to tangible net worth of 0.8x, which lenders have now agreed to raise to 1x until end-June.
Meanwhile, Deutsche Bank is also arranging a three-year loan of up to US$15.6bn for the developer.
The Deutsche-led deal has a base size of HK$4bn and carries security in the form of a first-priority charge over NWD’s landmark Victoria Dockside development in Hong Kong’s Tsim Sha Tsui district.
Proceeds will be partly used for the prepayment, repayment, purchase or repurchase of the company’s existing debt. NWD also plans to use part of the proceeds to pay back part of the HK$87.4bn refinancing when the deals are completed.
The group proposed that should the final amount of the Deutsche-led deal reach HK$15.6bn, it will use 25% of the new facility to repay part of the HK$87.4bn refinancing. Should the size of the new loan fall between HK$11.7bn and less than HK$15.6bn, 20% of the proceeds will be used for that purpose. And if the final size is less than HK$11.7bn, 15% of the loan will be applied to repay the refinancing.
It also comes with a letter of comfort from NWD shareholder Chow Tai Fook Enterprises. Hong Kong billionaire Henry Cheng’s family controls Chow Tai Fook, which owns a 45.24% stake in NWD.
The LTV ratio of the borrowing is around 25% based on a valuation of around HK$66bn of the three-million-square foot Victoria Dockside.
Lenders are offered an all-in pricing of 130bp, via an interest margin of 105bp over Hibor, and asked to respond by July 11.
Hong Kong Island Development will be the borrower, while NWD and Cosmostar Holdings will provide guarantees to the Deutsche-led loan, according to the invitation letter seen by LPC.
The term sheet for the HK$87.4bn refinancing states that the security for the HK$63.4bn facility comprises about 27 properties, valued around HK$120bn as at the end of June 2024, of which HK$88bn was unencumbered.
The second portfolio of around 13 properties that serves as security for all loans due in 2027 and beyond was valued at HK$30.5bn with HK$29.5bn of this unencumbered.