361 Degrees: Time to tender

The DEGREE 7.250% 03Jun2021 Corp (USD) notes have not offered bondholders much peace of mind in 2020. However, we are seeing some light at the end of the tunnel.

On 4 Jan 21, 361 Degrees announced that they intend to repurchase up to a maximum acceptance amount of US$135.0 million of the 2021 bonds, which is about half the current outstanding issue size of US$266.1 million. As the opportunity cost is low, bondholders should accept the offer.

In our previous article, we noted that 361 Degrees hold a sizable amount of cash but in RMB. They will be using these stockpile to repurchase the notes. Assuming an exchange rate of RMB 6.5 to USD 1, this repurchase would subtract about RMB 870 million from their cash stockpile. It is no small sum but still leaves a substantial amount in their holdings.

Table 1

Cash holdings after repurchase

While COVID-19 has affected their sales and the firm has also updated that their revenue for 3Q20 declined by high single digit YoY, it is unlikely that they will register a loss for 2H20 and for the full FY20. The notes are also their only significant debt, thus there should not be any surprising or significant hit to their cash balance.

Will 361 Degrees default on the remaining amount?

While most companies do not default after repurchasing their bonds, there have been rare occurrences of the opposite happening.  One example is CW Advanced Technologies who defaulted on their bonds one year after repurchasing their bonds. For 361 Degrees, it seems unlikely that the same fate will fall upon them.

There are a few reasons as to why 361 Degrees repurchased their notes. Perhaps they are anticipating a smaller quota from the Nation Development and Reform Commission (NDRC) which will restrain them from issuing a large amount to refinance their bonds (more on this in our future podcast episodes).  By repurchasing their bonds, it will make refinancing easier. Lower interest rates globally will also mean lower interest expense if they refinance their bonds.

They might intend to redeem the full amount of their notes without refinancing, but due to restrictions on remittance of cash, they have to do it in batches. Remitting the remaining outstanding amount of notes in RMB will mean that 361 Degrees would have remitted the most amount in a single year, and it is likely that they will be able to do that.

Lastly and cynically, this offer could be announced to allow insiders to tender their bonds first while the company defaults on the rest in June. However, this is extremely unlikely and the first reason seems to be the most probable one.

As the tender offer is at a repurchase price of par, what bondholders will be missing out will only be about 3% in interest if they accept the offer. As the offer expires on 12 Jan, we recommend bondholders to accept the offer as soon as possible. If you are unlucky and not chosen for the offer, fret not as default seems unlikely too.

What to transit to?

In the below table, we have a list of high yield and short-term bonds that you can roll your investment into if you managed to tender your 361 Degrees bond.

Table 2

High yield names that you can consider

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a principal position on the EVERRE 8.25% 23Mar2022 (USD), FTHDGR 7.375% 04Oct2021 (USD), FTHDGR 7.950% 05Jul2022 Corp (USD), LVGEM 12.000% 10Mar2023 Corp (USD), ESRCAY 7.875% 04Apr2022 Corp (USD) and DEGREE 7.250% 03Jun2021 Corp (USD). The analyst who produced this report hold a NIL position in the abovementioned securities.