Heeton invited bondholders for an exchange offer of its 2023 notes

• Bondholders have to make a cash top-up of SGD 20,000 for every SGD 180,000 in principal amount
  
  
• Early Exchange Deadline falls on 14 April 2023 at 5 pm, while the expiration for invitation falls on 19 April 2023 at 4pm
  
  
• The new note will have a coupon rate of 7%, and is expected to be issued on 2 May 2023 while maturing on 2 November 2026
  
  
• We recommend taking up the exchange offer, although the cash top-up might be inconvenient for some
  

Heeton Holdings Limited (“Heeton”) announced an exchange offer on 30 March 2023 for its existing bondholders of HTONSP 6.800% 13Nov2023 Corp (SGD). In respect of each SGD 180,000 in principal amount of the existing notes, alongside a cash top-up of SGD 20,000, bondholders will be exchanged for SGD 200,000 in principal amount of the new notes. The new notes are expected to be issued on 2 May 2023, with an expected maturity date of 2 November 2026. The new notes will have a slightly higher coupon rate at 7.0% per annum, payable semi-annually in arrears.

Bondholders will receive an exchange fee should they choose to accept the exchange offer. For acceptance before the Early Exchange Deadline (5pm, 14 April 2023), bondholders will receive 0.50 per cent of the principal amount of the relevant offered notes. Otherwise, for acceptance after the Early Exchange Deadline but before the expiration of the invitation (4pm, 19 April 2023), bondholders will receive 0.25 per cent of the principal amount of the relevant offered notes.

With respect to the cash top-up of SGD 20,000, Heeton mentioned that this is to allow the issuance of new notes in principal amounts of SGD 200,000 as minimally required by the Securities and Futures Act. In addition, it should be noted that the exchange offer is only valid for principal amounts of SGD 180,000 or in multiples thereof.

Financial Results for FY2022

With the recovery from COVID-19 pandemic, Heeton saw significant growth in its profit from operations, increasing ~70% from SGD 10.4m in FY21 to SGD 17.6m in FY22. While its profit after tax at SGD 4.4m in FY22 is considerably lower than the SGD 28.4m in FY21, much of the profit in FY21 came from the reversal of impairment of property, plant and equipment (“PPE”) at SGD 32.8m rather than coming from its operations.

Across its three business segments – property investment, property development and hospitality – hospitality remains the primary driver of revenue, which saw strong growth alongside the recovery in tourism. Revenue from the hospitality operating segment rose from SGD 37.9m in FY21 to SGD 60.7m in FY22. Unfortunately, with the bulk of hospitality properties situated in the United Kingdom, Heeton saw losses in its foreign currency translation difference of SGD 24.7m due to the depreciation of GBP in FY22.

With tourism bouncing back, it appears mostly optimistic for Heeton with a diversified business portfolio, as reflected by the improving operating profit from FY21 to FY22. Despite the Singapore government’s attempt to dampen the property market demand, Heeton still managed to achieve more than 93% sales within the first month of the launch of its latest property development project. As the hospitality business segment continues to be its core portfolio, we are still expecting to see further improvements to its profitability in 2023.

Heeton’s borrowings are mostly bank term loans at SGD 336.0m and outstanding fixed rate notes of SGD 62.7m. The unsecured borrowings only amount to SGD 3.2m, as compared to the secured borrowings of SGD 332.8m, in which its investment properties and PPE were pledged for the borrowings – valued at SGD 372m and SGD 217m respectively.

Its limited cash and cash equivalent at SGD 59.7m in FY22 would be insufficient to redeem the outstanding notes. However, with assets still available for pledging, Heeton is likely to be able to obtain secured borrowings with ease should the need arise. As such, investors should not have to worry about Heeton’s ability to redeem the bonds on maturity.

Should you accept the exchange offer?

We wish to point out that it might be an administrative hassle to accept of the offer due to the cash top-up of SGD 20,000 (please check the full procedure and relevant terms and conditions as stated in the Notice of Exchange Offer Exercise by Heeton).

With the interest rates likely to further stabilise in the latter half of 2023, investors might not find similar opportunities upon the maturity of the note in November 2023. Spreads are more likely to tighten than widen by end-2023, making the 7% coupon with 3 years to maturity an attractive consideration. On the other hand, there is a lack of non-perpetuals high-yield alternatives offering similar yield and duration, where only OHLSP 6.900% 08Jul2024 Corp (SGD) offers a higher yield to maturity, albeit with only 1.26 years remaining. Liquidity for such high-yielding notes have been limited in the recent period as well, thus finding a replacement at a suitable price might be difficult.

Table 1
High-yielding notes in the real estate sector

We believe it might be a good offer for investors, although the cash top-up of SGD 20,000 might be inconvenient for some. As Heeton’s profitability potentially improves from the continued demand in tourism, the increment to a 7% coupon is more than justified for investors looking to extend their high-yield notes.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in OHLSP 6.900% 08Jul2024 Corp (SGD), OHLSP 7.500% 24Aug2023 Corp (SGD), and TSHSP 6.900% 18Oct2024 Corp (SGD) and the analyst who produced this report holds a NIL position in the abovementioned securities.

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