JTC: Purchase offer is consistent with market practice

WE refer to the article "JTC makes early-buyback offer for Jurong Country Club notes" (BT, Aug 26, 2016).

Prior to 2003, Jurong Country Club (JCC) was a proprietary club under Jurong Country Club Limited (JCCL), a wholly owned subsidiary of JTC. In 1993, to raise capital for a new clubhouse and upgrading works at the golf course, JCC sold 196 memberships bundled with notes issued by JCCL. Each membership with note was priced at S$150,000, comprising S$30,000 for the membership and S$120,000 for the note. The notes were interest-free, unsecured and due for redemption on Sept 1, 2033. In comparison, we understand memberships without notes were trading in the secondary market at S$105,000 to S$119,000 between 1992 and 1993.

In 2003, JCC was converted from a proprietary club to a club owned by its members. The assets of the club, including the clubhouse and golf course, were transferred to the new members' club for the enjoyment of members. In order not to impose a financial burden on the club at its inception, the General Committee of JCC requested JTC to take over the repayment liability of the notes. JTC agreed and issued new JTC notes to replace the original notes issued by JCCL. Other than the change in issuer, the JTC notes are substantially the same as the earlier notes, including the issuer's obligation to redeem in 2033.

In 2015, the Singapore Land Authority announced that the government would be acquiring the land occupied by JCC. Following the announcement, JTC informed all noteholders in writing that the land acquisition did not affect their rights as noteholders and assured them that JTC would honour its obligation to redeem the notes in 2033. Furthermore, the terms and conditions of the notes allow the notes to be held independently of the club membership.

Based on the calls received by JTC and feedback from the Debenture Note Working Committee, we understand that certain noteholders do not want to hold the notes until maturity in 2033. While the terms and conditions of the notes do not provide for immediate redemption upon compulsory land acquisition, there is a condition that allows JTC to purchase the notes. Therefore, JTC has decided to make a purchase offer to give noteholders an additional option to monetise the notes.

Given that the notes are due only on Sept 1, 2033, JTC has to determine an appropriate offer price to take into account the fact that noteholders would be receiving payment 17 years earlier. As such, JTC adopted the discounted cash-flow method, which is commonly used in the market.

The discount rate used was the yield of Singapore government bonds, commonly known as the risk-free rate. Based on this methodology, JTC's offer price is S$84,200 for notes with a principal value of S$120,000. In comparison, we understand that memberships with notes were traded in the secondary market at S$61,000 to S$64,000 during the period 2012 to 2014, while memberships without notes were traded at S$44,800 to S$50,400 over the same period. Hence, we believe JTC's offer of S$84,200 for the notes alone is fair and reasonable.

The noteholders are not obliged to accept JTC's offer. They can choose to hold the notes to maturity in 2033 to receive the full principal amount. Whether the noteholders choose to accept JTC's offer or hold the notes to maturity in 2033, the offer does not affect the rights they now have as members of the club, along with the other 2,500 members. In that regard, we understand that JCC intends to distribute the compensation amount from the land acquisition, net of expenses, to members.

We have invited the noteholders for a briefing on Sept 1, 2016, to share on the approach taken in making the purchase offer and in deriving the offer price, as well as to address their queries.

Harold Soong Director, Corporate Finance JTC