New World’s talks with foreign investors stall over concessions
There is disagreement over how much control the clan is prepared to hand over in return for a capital injection
[HONG KONG] Talks between the billionaire Cheng family and potential investors in New World Development are stalling, underscoring the challenges facing the indebted company as it seeks to secure much-needed funding.
The impasse is due to disagreement over how much control the clan is prepared to hand over in return for a capital injection and risks gutting the chance of a deal, said people familiar with the matter.
The Chengs are looking for a partner to match a possible capital injection of about HK$10 billion (S$1.67 billion) in return for an equity stake, Bloomberg News reported in September. In recent months, Blackstone has made an investment proposal, which includes control in the deal, the people said, asking not to be identified discussing private talks. CapitaLand Group has also been in discussions for a potential investment, they said.
The proposals have so far failed to elicit a clear response, while the family has yet to fully comply with requests to conduct due diligence on New World’s assets, the people said.
Pressure to finalise a deal is mounting. Although New World secured a record US$11 billion in loan refinancing earlier this year, the company needs funding to help reduce its debt load and maintain operations. The developer has about US$7.9 billion of outstanding bond repayments, according to Bloomberg-compiled data. Total liabilities were around HK$213.5 billion at the end of June.
“Absent a capital injection from the Cheng family, any new financing plan could still fail to satisfy market expectations, even if it manages to attract support from bondholders,” said Brock Silvers, managing director at private equity firm Kaiyuan Capital.
Concern over New World’s outlook has dragged its shares down 86 per cent since a 2019 high, wiping out US$15.6 billion in value. Most of its perpetual bonds are trading at around 45 US cents on the dollar.
Part of the problem is patriarch Henry Cheng needs to balance the interests of a wide number of family members, people familiar with the matter said, adding that members hold a range of opinions on a potential rescue plan.
More than half of the Cheng family’s key decision makers don’t have a board role or direct equity holding in New World. Some of those see growing their own businesses as a higher priority, people familiar with the matter said.
Other companies in the family empire include listed arms Chow Tai Fook Jewellery Group, co-led by Henry Cheng’s daughter Sonia; CTF Services, co-headed by son Brian; as well as the private investment vehicle Chow Tai Fook Enterprises, co-led by son Christopher.
Some family members are concerned that even after pouring billions of dollars into New World’s rescue, they will still end up losing control of prized assets if a deal goes ahead, separate people familiar with the matter said. The family is still weighing other options including funding proposals by different investors as well as asset sales, the people said.
The Chengs are worth about US$31.7 billion, making them one of the richest families in Asia, according to the Bloomberg Billionaires Index. New World, one of Hong Kong’s “Big Four” developers, was founded in 1970 by Cheng Yu-Tung.
Representatives for Chow Tai Fook Enterprises and New World didn’t respond to requests for comment.
A spokesperson for CapitaLand’s listed asset manager arm CapitaLand Investment said it doesn’t comment on market rumours or speculation. A Blackstone spokesperson declined to comment.
New World is pushing ahead with ways to tackle its debt burden and address its liquidity issues. The company last week unveiled a plan to swap some of its existing dollar notes to as much as US$1.9 billion in new debt – a sign the earlier record refinancing didn’t do enough to stop the bleeding.
Banks are increasingly reluctant to offer further support, reinforcing the need for some kind of outside investment. While New World secured a HK$3.95 billion loan in September, the amount was 75 per cent less than the upper end the company had earlier been seeking.
New World’s cash remains tight and the company is estimated to face a funding gap of up to HK$15 billion in the current financial year ending June, said Zerlina Zeng, head of Asian strategy at Creditsights Singapore.
Many of New World’s assets have already been pledged to banks for loans, including its prized Victoria Dockside complex, its headquarters New World Tower, as well as office buildings at its 11 Skies Mall next to the airport. The value of investment properties held by the firm was about HK$205 billion at the end of June.
“Banks will most likely refrain from increasing exposure to New World, while adding collateral and interest rate requirements to the refinanced loans,” said Jeff Zhang, an analyst at Morningstar Inc.
Hong Kong banks have been stepping up scrutiny on lending to the real estate sector as they grapple with bad loans that ballooned to a two-decade high of US$25 billion. HSBC Holdings, the city’s biggest lender, warned last month that the commercial property sector continues to face “downward pressure.”
Another obstacle to any deal is New World’s rental obligations at 11 Skies. Under an existing agreement, the developer will pay a guaranteed rent of HK$1.8 billion a year, or up to 30 per cent of the project’s annual gross revenue – whichever is higher, according to stock exchange filings and a note from UBS Group.
The company is in talks with the Airport Authority to waive at least part of the requirement at the struggling mall, Bloomberg News has previously reported. Yet investors are reluctant to push ahead with a concrete proposal until there is clarity on the outcome of the discussions, people familiar with the matter said.
It’s unlikely any deal could be reached before year-end due to the complexity of dealing with a government counterparty, the people said.
“Regardless of what final form it takes, New World needs more capital injection to reduce debt and leverage,” said Gary Ng, senior economist at Natixis. “It is a tug-of-war over how much capital the family is willing to inject and the risk premium that outside investors are willing to accept.” BLOOMBERG
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