EC World Reit flags potential asset sale delay due to transaction financing hiccups
Vivienne Tay &
Russell Marino Soh
THE transaction financing long-stop date for the purchasers of EC World Real Estate Investment Trust’s ( EC World Reit ) divestment properties has lapsed, potentially delaying the divestment past the Reit’s deadline to repay a portion of its outstanding loans.
EC World Reit in October announced that it would be divesting its indirect interests in Bei Gang Logistics and Chongxian Port Logistics for a total of 2.03 billion yuan (S$392.7 million). Part of the proceeds from the divestment will go towards repaying 25 per cent of the Reit’s outstanding onshore and offshore loans by Dec 31, as required by its lenders.
On Sunday (Nov 20), the Reit’s manager said “stringent” Covid-19 controls, the Chinese National Day holiday and the Communist Party of China’s 20th Party Congress had caused delays in lenders’ internal approval processes for the transaction financing. The purchasers were therefore unable to complete the transaction financing processes before the long-stop date of Nov 18.
The manager said EC World Reit has three options moving forward.
First, it could proceed to have the purchasers enter into transaction financing even though the long-stop date has lapsed. In this case, the Reit’s sponsor would no longer indemnify any costs and expenses incurred as a result of the divestment.
Second, the Reit could complete the divestment without entering into transaction financing, subject to certain conditions. The manager highlighted that transaction financing is not actually required for the divestment to proceed.
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Third, the Reit could terminate the equity purchase agreement for the divestment. However, its manager said failure to enter into transaction financing is not grounds for termination.
The manager noted that with the failure to enter into the transaction financing by Nov 18, the divestment could be delayed past Dec 31.
In its initial announcement on the divestment, the manager said it believed there was a “real risk” of not being able to meet the 25 per cent repayment obligations if the divestment is not completed.
“If the completion of the divestments is indeed delayed beyond Dec 31, 2022, it calls into question if EC World Reit will still be able to meet the conditions set by its lenders in order to refinance the loans due Apr 30, 2023,” said DBS Group Research analysts Dale Lai and Derek Tan.
Following the announcement, they have downgraded EC World Reit by two notches to “fully valued” from “buy”. The research team has also slashed its target price on the counter to S$0.40 from S$0.55 to account for the uncertainty.
This implies a potential downside of 11.1 per cent from EC World Reit’s last trading price of S$0.450 as at 4.08 pm on Monday. The Reit’s units were trading 7.2 per cent or S$0.035 lower at the time.
With the proposed divestments, Lai and Tan expect the pro-forma net asset value of the e-commerce logistics Reit to fall to S$0.7816.
Although EC World Reit had cited logistical delays for the failure to obtain the transaction financing, DBS believes the matter will “undoubtedly” lead to concerns over the Reit’s sponsor’s financial standing.
The research team noted that a majority of the Reit’s earnings at present come from master leases with its sponsor. Thus, any negative impact on its master leases with its sponsor will severely pose a downside risk to Reit’s earnings.
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