· Aspial Corporation Ltd is proposing an exchange offer on its 2021 notes, seeking to exchange these notes into new notes that carry a coupon of 6.15% with an expected maturity on 22 January 2024.
· We think that the company’s credit profile remains weak with an elevated net gearing ratio and fallen cash reserves.
· Development pipeline remained dry and the potential projects ahead will likely require further debt support.
· We think the exchange offer is not appealing to noteholders given the group credit risks associated with its stretched balance sheet
On 4 Jan 21, Aspial Corporation Ltd (“ACL”) announced an exchange offer with regards to the S$50m ASPSP 5.900% 19Apr2021 Corp (SGD) and S$115m ASPSP 6.250% 11Oct2021 Corp (SGD). The group invites noteholders of the above bonds to exchange their existing notes for new notes that would carry a coupon rate of 6.15% per annum payable semi-annually for a three-year tenor. The new notes are expected to have a maturity date falling on 22 Jan 24.
Noteholders who submit their acceptance on or prior to 5pm on 14 Jan 21 (“Early Exchange Deadline”) will receive an exchange premium in cash of 0.30% of the principal amount of the notes. Thereafter, the exchange premium will be 0.15% if instructions are submitted after the Early Exchange Deadline and prior to the exchange expiration deadline of 10am on 18 Jan 21. We provide some comments to the exchange offer as well as some credit updates on its latest financials.
About Aspial
Established in 1970, Aspial Corporation Ltd started its business as a traditional jeweller under a stable of household brand names including Aspial, Lee Hwa Jewellery, Goldheart and Citigems. The company has since diversified into other businesses including property development and financial services, with the latter mainly operated through SGX-listed Maxi-Cash Financial Services Corporation Ltd (“Maxi-Cash”). As of 7 Jan 21, Maxi-Cash has a market cap of S$177.0m. Aspial reports revenue primarily through three business segments namely Jewellery, Financial Service, and Real Estate.
The founding Koh family controls more than 80% of Aspial’s shares. Mr Koh Wee Seng has led the company as CEO since 1994. His siblings, Ms Ko Lee Meng and Ms Koh Lee Hwee sit on the board of directors as a non-executive and non-independent director, and executive director respectively.
Dry development pipeline
Like every other business, Aspial was affected by the pandemic to a certain degree which led to a general slowdown of its development pipelines. Back in 2019, Aspial had been mostly focusing on the development and marketing of Australia 108. Launched in 4Q14, Australia 108 is a residential project with 1,103 luxury apartment units, touted to be Melbourne’s tallest residential building with 101 floors. The group has recently completed the project in 4Q20.
We last note that as at 1Q19, 88% of units were sold at Australia 108. This figure had fallen from a high of 98% that was reported a year ago in 1Q18, suggesting that buyers had been walking away from their purchase agreements. We also observed that Aspial had not disclosed the sales progress of its projects from 2Q19 onwards, which raised our concerns that the number of units sold at Australia 108 might have continued to drop. There could also be cash collection issues on sold units as the pandemic have broadly affected almost all economic prospects.
Other than Australia 108, the group will continue to sell the remaining units at Nova City Tower 1. Launched in 4Q16, Nova City Tower 1 is a residential and commercial mixed-use development project with a total of 196 units. As at 31 Mar 19, 101 units were launched and 40% of these were sold. Strangely enough, sales have not improved as the percentage of sold units remained constant at 61% (4Q18: 61%), possibly signaling that demand for the property has been weak.
The group has also obtained approval to develop a property at Albert Street, Brisbane, Australia into a 91-storey mixed development tower. It also has a property at Margaret Street in Brisbane that could potentially offer a development plan.
Meanwhile, Aspial operates seven hotels comprising 121 rooms with a total of 72 keys in Penang, Malaysia. Aspial expects its hotel portfolio in Penang to increase to about 350 keys by the end of 2021. While this could potentially provide more recurring income, we understand from a previous management presentation that proceeds from these Penang hotels are a small contributor to group profitability.
1H20 results: financial services segment provided much lifting
Revenue in the half year ended 30 Jun 20 (“1H20”) fell 25.1% YoY to S$234.2m due to a decrease in contributions from its real estate and Jewellery businesses. Given a dry development pipeline, revenue from the real estate operations dropped 38.6% YoY, which comprised mainly of sales from Australia 108. Dampened shopper’s demand from pandemic containment measures in Singapore has also caused revenue from the Jewellery segment to fall to S$34.0m (1H19: S$63.4m).
Its financial services division however saw an 11.7% YoY increase in revenue to S$102.8m led by higher pawn broking trading activities. The segment registered a profit before tax of S$12.1m (up 76.9% YoY), thanks to higher profit contributions from the pawn broking and trading businesses. Meanwhile, the real estate segment saw a 25.0% YoY decline in profit before tax to S$12.6m, which is in line with the revenue drop. Meanwhile, its Jewellery business recorded a small profit before tax of S$0.1m during the period, against a pre-tax loss of S$2.1m in 1H19.
While Aspial’s Jewellery and pawn broking businesses have picked up in recent years, we note that they operate on a smaller scale relative to its property segment. Furthermore in the near term, its Jewellery unit could remain affected by falling retail traffic due to the ongoing pandemic developments.
Overall, Aspial’s interest coverage ratio (EBIT over interest) was broadly stable at 2.4x in 1H20 (1H19: 2.4x). In the longer term however, we note that its interest servicing capability, despite the recent pick-up, has declined steadily over the years, falling to 1.9x in 2019 from 2.8x in 2018 (2012: 6.9x). Beyond the Australia 108 project which has been completed and are expected to contribute positively to its bottom line for FY20, we think Aspial will have to work on its development pipeline to maintain a manageable interest cover.
Credit Highlights
At the end of June 2020, Aspial’s total debt remained high at S$952.0m despite narrowing from S$1.1 billion as at 4Q19 (4Q18: S$1.2 billion). Meanwhile, cash and bank balances fell substantially to S$65.0m as at 1H20 (4Q19: S$146.2m) as the group paid down some borrowings in 1H20. Net gearing (defined as net debt over total equity) subsequently fell to 2.1x from 2.3x over the same period, though is still at an elevated level in our opinion.
Aspial’s financial liquidity looks tight with S$667.8m of debt to be repaid within the next twelve months - a comparatively big sum relative to just S$65.0m of cash and bank balances on hand. Aspial’s refinancing wall is worryingly high even if we exclude the S$226.6m of short-term borrowings at Maxi-Cash, or optimistically assuming that it can roll over S$455.0m of secured short-term debt.
To pare down its indebtedness, Aspial will likely have to rely on proceeds to be collected from the sale of units at Australia 108 or external financing. While we saw some financial breathing space provided by future cash flows to be received from Australia 108, we continue (see article “Aspial Corp: Credit Update 20 Jan 2020”) to opine that future projects are likely to depend on debt financing. The heavy capital expenditure that is required from property developments may also dampen its already stretched balance sheet.
On the exchange offer
The current S$50m ASPSP 5.900% 19Apr2021 Corp (SGD) and S$115m ASPSP 6.250% 11Oct2021 Corp (SGD) are indicating an ask yield-to-maturity (“YTMs”) of 8.63% and 5.70% respectively. Meanwhile, the S$50m ASPSP 6.500% 20Mar2023 Corp (SGD) carries a YTM of 4.10%. As of 20 Mar 20 at issuance, about 87.5% of the ASPSP 6.5% Mar’ 23s have been allocated to certain controlling shareholders of the company. Hence, the S$50m ASPSP 6.5% Mar’ 23s may be poorly reflective of actual market prices due to a significant amount held by insiders.
In addition, we also note that certain directors of the company have interests in both the ASPSP 5.9% Apr’ 21s and ASPSP 6.25% Oct’ 21s, while Aspial Corporation Limited and its subsidiaries hold S$2.75m and S$0.25m in the two issues respectively.
Bondholders who have a higher risk appetite and looking to extend their credit exposure to Aspial may consider taking up the offer. Taking into account the 0.30% early exchange premium, bondholders accepting the exchange offer would receive a three-year 6.15% Aspial bond that yields around 6.3%. This represents a spread of about 603bps above the SGD swap offer rates.
While we believe that management is proactively tackling its near-term debt maturities, a majority support from bondholders in favor of the exchange offer may also be needed given the very tight near-term liquidity. Aspial will have to redeem both the ASPSP 5.9% Apr’ 21s and ASPSP 6.25% Oct’ 21s if the offer falls through, aggregating to a principal amount of S$165m against a cash position of S$65.0m as at 30 Jun 20.
On the flipside, the decision for noteholders comes down to the question of whether a ~6.3% yield is attractive enough for bondholders to extend their credit exposure to Aspial for another three years. To reiterate, ASPSP’s longer dated 6.5% Mar’ 23s do not seem to provide a good gauge of actual market prices. Given Aspial’s elevated net gearing and the current indicative ask YTM of 8.63% and 5.70% on the ASPSP 5.9% Apr’ 21s and ASPSP 6.25% Oct’ 21s papers respectively, we think the incentive of the exchange offer is not appealing.
To sum up, our pessimism on Aspial’s credit profile, despite some relief at the sight of improvements from its Jewellery and pawn broking businesses, remain centered on its significant refinancing risk, uncertain sales progress and cash collection ambiguity from Australia 108. In addition to these factors, considering its elevated net gearing profile, we remain negative on the company’s credit outlook.
For investors looking to increase their exposure to credits similar to that of the Aspial bonds, we can also compare this new ASPSP issue with other real estate credits in the SGD space. The OHLSP 6.500% 28Feb2023 Corp (SGD) offers better value than the new ASPSP ’24s. As a reference, the S$75m OHLSP 6.5% ‘23s is currently indicating an ask YTM of 17.1% (as of 7 Jan 21 with a Z-spread of 1,689bps), much more enticing than the yield of this new ASPSP 2024 issue with a relatively shorter tenor.
Meanwhile, we also wish to highlight that in contrast to Aspial, Oxley has better cash flow visibility and a decent pipeline of property projects to support its debt obligations (see article “Oxley Holdings Limited: Credit update 18 Sep 20”). We also think that Oxley will be able to meet its debt obligations through asset monetization.
Looking across the space, there are also other credits within the SGD space that are offering a better yield than the proposed new 6.15% ASPSP Mar’24s. For example, the S$100m CHIPEN 6.000% 15Mar2022 Corp (SGD) with its ask YTM of 6.97% (Z-spread: 679bps) represents a good alternative for high-yield seekers given its relatively healthier credit profile relative to Aspial. As at 30 Jun 20, Chip Eng Seng Corporation Ltd reported a net gearing ratio of 1.6x, which is lower than Aspial.
Declaration: For specific disclosure, at the time of publication of this report, IFPL holds a position in OHLSP 6.375% 21Apr2021 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.
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