FWD Group launches consent solicitation exercise to restructure debt

FWD Group’s parent, PCGI Intermediate Holding Limited (“PCGIIH”), announced on 17 June 2021, a proposed initial public offering (“IPO”) for American Depositary Shares (“ADSs”) representing its Class A ordinary shares in the United States.

In order to centralise the treasury functions of FWD Group Limited (“FWDG”), FWD Limited (“FWDL”) and PCGIIH, it is proposed that the outstanding indebtedness of FWDG and FWDL be either (1) transferred to PCGIIH (2) and/or prepaid, (3) repaid or (4) refinanced.

Accordingly, noteholders of FWDG and FWDL are invited to consent to the proposed changes of the terms and conditions for the relevant securities. Here is a brief summary of the proposal and we will provide our recommendation to noteholders in this article.

Background

PCGIIH is the parent entity of FWD Group and is owned by Richard Li, one of Hong Kong’s wealthiest tycoons. PCGIIH has a 72.68% stake in FWDG and FWDL, making it a major shareholder of the FWD Group. For more information about the group structure, kindly refer to our earlier article - “FWD Group: tycoon Richard Li's insurance empire offers bonds in excess of 5%”

PCGIIH has submitted its intent with the U.S. Securities and Exchange Commission (“SEC”) for the listing of American Depository Shares (“ADS”). However, the amount of ADS offered and the price range for the IPO have yet to be determined as the SEC has yet to complete its reviewing process.

Financial highlights

The FWD Group had been on a buying spree as it was trying to grow its insurance empire at the fastest pace possible. PCGIIH doubled its total revenue from USD 4,688m in 2018 to USD 9,487m in 2020. However, the insurance giant is loss making as it incurred more expenses than its top-line and reported a net loss of USD 252m in 2020 and a net loss of USD 196m in 2018.

Total equity increased from USD 4,023m in 2018 to USD 8,225m but adjusted equity, which excludes the amount of perpetual securities increased from ~USD 3,026m in 2018 to ~USD 6,618m in 2020.

We believe that the group has a sound liquidity profile. The group’s cash position of USD 2,730m is adequate enough to cover its USD 274m of borrowings due in 2021, USD 1,960 of borrowings due in 2022 and USD 250m FWDINS 6.250% Perpetual Corp (USD), which is callable in January 2022.

FWDG has maintained high solvency ratios in spite of its weak earnings. FWD Life Insurance Company (Bermuda) Limited, FWD Life Insurance Public Company Limited and FWD Fuji Life Insurance Company, Limited had solvency ratios of 290%, 436% and 1,151% respectively. Total available capitals for the companies are also well above their regulatory minimum capital requirements of 442m, 397mm and 212m.

Summary of the Proposal

Table 1: Relevant Securities under the CSE

In respect of the CSE, noteholders who submit voting instructions in favour of the extraordinary resolution on or prior to the early consent deadline of 11:00 p.m. (Singapore time) on 30 Jun 21 will be eligible to receive the early consent fee (see Table 1), which is expressed as a percentage of their principal amounts.

Noteholders who submit said instructions after the early consent deadline but on or prior to the expiration time of 11:00 p.m. on 6 Jul 21 will receive the expiration time consent fee instead. If the CSE goes through, FWD Group will pay the relevant consent fee to eligible bondholders within five business days following the noteholder meeting on 9 Jul 21. To implement the proposal, FWD Group and PCGHII will require majority of the votes cast representing not less than 75% of the principal for each security to approve the extraordinary resolution.

The CSE invites noteholders to approve amendments to substitute all of FWD Group’s existing notes with PCGIIH as the issuer. This means that holders of the notes will instead be holding securities issued by PCGIIH. As such, PCGIIH will be become the obligator of the indebtedness of FWD Group. We view this request positively as PCGIIH has sufficient liquidity and a sound balance sheet.

Among the proposed changes, the CSE is seeking to amend the cross-acceleration threshold of both FWDGRP 5.750% 09Jul2024 Corp (USD) and FWDINS 5.000% 24Sep2024 Corp (USD) from USD 10m to USD 20m. The increase in cross-acceleration threshold will provide PCGIIH more flexibility in terms of managing its debt as the threshold to be deemed default is raised.

Upon implementation of the proposals, Moody’s and Fitch will assign PCGIIH a long-term issuer rating. Currently, FWDL has a long-term rating of ‘Baa3’ by Moody’s and ‘BBB+’ by Fitch. It is expected that upon completion of the debt restructuring, the long-term rating of PCGIIH will be equal or higher than FWDL.

It is expected that PCGIIH will be renamed FWD Group Holdings Limited prior to the expected initial public offering. PCGIIH will also issue shares to the non-controlling shareholders in exchange for their holdings in FWDG and FWDL. Consequently, FWDL and FWDG will become wholly-owned subsidiaries of PCGIIH.

Recommendation

We recommend noteholders to vote in favour of the CSE. The potential IPO from PCGIIH is expected to provide additional capital to the company. By centralising its treasury functions, PCGIIH will be able to restructure its debt in order to better manage its indebtedness and business operations in order to meet its repayment obligations. Furthermore, by increasing the cross-acceleration threshold of its 2024 notes, it will provide PCGIIH more flexibility in managing new and existing debt and lowering its probability of defaulting.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position and the analyst who produced this report holds a NIL position in the abovementioned securities.

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