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SGX queries Capital World on dilutive impact of loans

THE Singapore Exchange (SGX) has queried Catalist-listed Capital World on the sustainability of entering a cycle of loans with increasing interest rates and high arranger fees. 

In a bourse filing on Thursday, SGX noted that Capital World plans to use about 90 to 95 per cent of the S$5.5 million from an Oct 3 convertible loan agreement (CLA) to repay another outstanding convertible bond. The Oct 3 CLA has a 15 per cent annual coupon. 

Earlier in February 2018, the property firm had entered an S$18 million convertible bond subscription agreement (CBSA) with a 10 per cent annual coupon. Capital World has since drawn down S$10 million from the CBSA. It has S$4.5 million in repayments outstanding, alongside accrued interest. 

Both the CLA and CBSA have the same arranger, Prosper Network Co, SGX noted in its query. The CLA has a S$385,000 arranger fee while the CBSA had a S$900,000 arranger fee, both in cash. SGX noted that Capital World's cash balance stands at S$1 million as at end-June. 

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"This seems to be a cycle of convertible bonds/loans with increasing interest rates which will have a very dilutive effect, and high arranger fees which are to be paid in cash to the arranger. Is this sustainable for the business?" the bourse questioned. 

SGX also asked how the audit committee decided that the CLA's arranger fee is "fair and not prejudicial to the interests of minority shareholders". 

The bourse further noted that both the CBSA and CLA have a common lender, Dato' Seri Chong Thim Pheng. The bourse questioned why an arranger was still needed for the recent CLA. Prosper Network is solely owned by the son-in-law of Dato Chong.

Capital World responded that the company has suffered from the weak property market in Johor over the past two years and has been unable to secure loans from financial institutions. It accepted the terms of the CLA to avoid defaulting on the CBSA, which could attract litigation.  

The company also said that the total cost of the Oct 3 CLA is lower than the CBSA, due to the absence of facility share fees that the CBSA had. Capital World added that terminating the CBSA provides more time to improve cash flow from operations. 

Capital World also said that the arranger fee would be funded from the CLA proceeds and not from its existing cash holdings. Despite the common lender for the CLA and CBSA, Prosper Network was still needed to "facilitate the financing", it added. 

"The company wishes to assure the regulators and its shareholders that the Company has no intention to recycle convertible bonds/loans with ever-increasing interest rate. The present circumstances are quite exceptional," Capital World said in its response. 

In response to SGX's query about approaching banks for loans, Capital World said that it had considered private funds for financing. However, these funds provide interest rates of between 15 per cent and 18 per cent, it explained. 

Capital World's cash flow has been hit by slow sales for its Capital City Mall and Serviced Suites, which is expected to launch in early-2020. The company is "cautiously optimistic" that the launch could alleviate the situation. 

Shares of Capital World closed flat at S$0.016 on Thursday.