On 2 September, KWG announced the Consent Solicitation for outstanding USD bonds and exchange offers for three bonds due in 2022 and 2023. Below are the specifications:
Table 1: KWG’s Exchange offer
|
Current Bonds |
New Maturity Date |
New Coupon Rate |
Principal Payment After Pass of Exchange Offer |
Payment of Remaining Part at Maturity |
|
KWGPRO 6.000% 15Sep2022 Corp (USD) |
15-Jan-24 |
6% |
5% |
95% |
|
KWGPRO 5.200% 21Sep2022 Corp (USD) |
21-Jan-24 |
6% |
5% |
95% |
|
KWGPRO 7.875% 01Sep2023 Corp (USD) |
01-Aug-24 |
7.875% |
N.R |
100% |
|
Sources: Company Announcement Data as of 2 September 2022 |
||||
Two bonds due in September 2022 will extend to January 2024. If the exchange offer is passed, bondholders who vote in favor can receive a consent fee of 0.25% of the bond par value plus an incentive fee of 0.5% of the bond par value. 5% of the principal will be paid in cash. Besides, the coupon rate of KWGPRO 5.200% 21Sep2022 Corp (USD) will be revised upward from 5.2% to 6%.
The bond due in September 2023 will extend to August 2024. Likewise, If the exchange offer is being passed, bondholders who vote in favour can receive a consent fee of 0.25% of the bond par value plus an incentive fee of 0.5% of the bond par value. Yet there is no principal paid immediately. It's noteworthy that eligible holders validly tendering their September 2023 bond will be entitled to receive 0.5% of the incentive fee even if the exchange offer is not consummated.
It is important to note that:
- The Minimum Acceptance Rate is 90% in aggregated principal amount of each outstanding for KWGPRO 6.000% 15Sep2022 Corp (USD)and KWGPRO 5.200% 21Sep2022 Corp (USD), 80% for the bond due in September 2023
- The exchange offer and consent solicitation will expire at 4 PM London time, on September 9, 2022. If the exchange offer is being passed, new notes will be issued on or after 15 September.
- Bonds could be redeemed anytime.
- There are some amendments to the default clauses, and KWG waives the event of cross defaults.
- Upon the sale of “specified assets”, KWG would allocate half of the excess of the net consideration amount of over USD 50 million to repay the new bonds such as coupon and principal repayments, and repurchase of bonds. (“specified assets” refers to Hong Kong Ap Lei Chau project)
News from Bloomberg said that KWG plans to pay the principals of bonds in installments. Below are the specifications:
Table 2: Amortization Schedule
|
Bonds |
15% |
20% |
65% |
|
|
KWGPRO 6.000% 15Sep2022 Corp (USD) |
23-May |
23-Aug |
24-Jan |
|
|
KWGPRO 5.200% 21Sep2022 Corp (USD) |
23-May |
23-Aug |
24-Jan |
|
|
5% |
15% |
50% |
30% |
|
|
KWGPRO 7.875% 01Sep2023 Corp (USD) |
23-Jul |
23-Sep |
24-Mar |
24-Aug |
|
Sources: Bloomberg Finance Data as of 2 September 2022 |
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From Table 2, bonds due in September 2022 will be paid in three installments, while the bond due in September 2023 will be paid in four installments. However, as of the publication of this article, the foregoing information has not been officially confirmed by KWG. Besides, investors should be mindful that the scheme reported by Bloomberg contradicts the exchange offer announced by KWG, which proposes to pay 5% principal for two bonds due in September 2022.
Short Commentary
Given that KWG faces a tremendous principal repayment, with the aggregated amount of USD 810 million, the exchange offer thus lies within market expectations. Notwithstanding the relatively high minimum acceptance rate (90% and 80% respectively), the exchange offer is earnest enough, we thus believe it may easily be passed. Our viewpoints are as follows:
First of all, KWG is one of the prime property developers. For a long period, over 90% of property projects of KWG situated in China's tier one and tier two cities, where the housing demand keeps solid. Additionally, the land bank is abundant, with an amount of 20 million square meters as of 30 June 2022. Given the contracted sales area of 1.4 million square meters in 1H2022, the ratio of land bank to contracted sales (1H2022's sale area*2) hit 7.4x, suggesting that the current land bank could meet the land demand in the next few years, without any new land purchase. The likelihood of getting rid of distress for KWG is very high if the Chinese property market picks up in the coming future.
Secondly, the company exhibits a strong willingness to repay debt. As early as April this year, KWG started to prepare the funding for the payment of bonds due in September, including the sales of the Hong Kong Kai Tak project (Upper Riverbank) and increasing of LTV ratio of the Hong Kong Ap Lei Chau project to get an additional fund. In July, KWG sold the project to Longfor Group for HKD 130 million. Yet the financing plan did not progress as expected after Logan property, a joint developer of the Ap Kei Chau project, stepped into distress, resulting in the rollover of bonds issued by KWG. Nevertheless, we believe that the company still maintains a high willingness for debt repayment. In particular, the company is committed to allow redemption of the bonds immediately as long as the company's liquidity improves, alleviating the concern of bondholders.
Furthermore, the Ap Lei Chau project in Hong Kong is expected to provide robust support for debt repayment. KWG expects that the certificate of compliance (“CC”) will be obtained in September 2022 to October 2022, and starts to sell thereafter. The project has a total GFA of 762,000 square feet, including 673,000 square feet of sellable resources, which translates to a potential value of approximately HKD 20 billion based on the average selling price of HKD 30,000 per square feet in nearby district. On account of 50% ownership of KWG, the attributable value will be HKD 10 billion. With reference to the credit enhancement measure mentioned above, the net consideration amount over USD 50 million (HKD 390 million) was around HKD 9.6 billion, and the amount that could be used for bond repayment is nearly HKD 5.0 billion, which is favourable to creditors to a certain extent.
To wrap up the points above, KWG's exchange offer looks reasonable as it not only adjusts the coupon rate upward for a bond due in September 2022 but also pay 5% principal for bonds due in September 2022, demonstrating its sincerity. Furthermore, If the principal will be paid in installments as rumored by the market, it would be an acceptable choice. As a consequence, the bond price rebounded following the release of the exchange offer, for example, from around $25 to $35 for bonds due in September 2022, showing a high satisfaction towards the offer by market. Therefore, we believe that bondholders can consider accepting the exchange offer.
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
