(Nov 13): Bond investors weighing up a crucial exchange offer by one of Hong Kong’s biggest property developers face a classic game theory dilemma: their best option depends on what everyone else does.
New World Development Co, an embattled property company, has given investors an early deadline of Nov 17 to accept a plan to swap some of its outstanding bonds for up to US$1.9 billion of new debt.
The new bonds will force some investors to book heavy losses but will also offer extra comfort from the cash flows of the company’s Victoria Dockside project, a crown jewel. Investors sticking with the old notes will take more risk but could see their bonds zoom higher on a successful debt swap.
The guessing game is a sign of the uncertain outlook for New World Development, once one of Hong Kong’s most successful property companies but now an increasing source of worry for investors and bankers nervous about the city’s tottering real estate market.
New World executives have worked hard over the past two weeks to convince investors the smart move is to accept the offer. Chief financial officer Edward Lau has held late-night talks with investors at New World Tower, the company’s headquarters in the centre of Hong Kong’s financial district, according to multiple investors.
Executives have also held meetings at the Singapore offices of HSBC Holdings plc, one of the banks working on the deal, investors said.
See also: Hong Kong home rents hit record high on strong Chinese demand
One of the lead banks told some investors on Monday they’ve received strong indications of interest for the swap, without providing any more details, according to an email seen by Bloomberg.
“Bondholders will lose something but in such a scenario, losing less is winning,” said Glen Ho, Asia-Pacific contingency planning and insolvency leader at Deloitte.
New World didn’t respond to a request for comment.
See also: New World’s talks with foreign investors stall over concessions
Guessing game
New World rose to prominence during Hong Kong’s long real estate boom but as a city-wide slump has worsened over the past few years, the company has been left more exposed than some of its biggest rivals. In September, New World posted its second year of losses in a row.
The company has already made major progress on easing debt repayment pressure, agreeing an US$11 billion loan refinancing with banks earlier this year. New World’s next step relies on the bond funds and high-net-worth individuals holding its perpetual bonds, which offer juicy yields to compensate for the fact that they never mature.
New World has offered to issue US$1.6 billion of perpetuals in exchange for its old notes at a price of 50 cents on the dollar, meaning it could buy back as much as US$3.2 billion of outstanding notes. It also plans a US$300 million debt swap for its conventional bonds, which will come at a lower haircut.
The tricky part for investors is figuring out whether other bondholders will go along for the ride. If New World is able to cut US$3.2 billion of its perpetual bond obligations in half, the chance of investors in the old notes once again earning coupons would rise — and bond prices may jump in response.
A successful swap could also reduce hurdles to the company raising equity, a key step in its attempts to reduce its debt burden and reassure investors. The founding Cheng family has been in talks with investors about matching a planned capital injection worth around HK$10 billion ($1.68 billion), although talks have recently stalled on disagreements over how much control the family should give up.
It wouldn’t be a surprise if the bond swap was a step toward a broader debt restructuring at the company, said Zerlina Zeng, head of Asian strategy at research firm CreditSights.
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The new perpetual bonds will be issued by a special purpose company, meaning they will not have a dividend stopper that can force New World to suspend dividend payments on its shares. Coupons on four of its outstanding perpetual bonds were put on hold earlier this year.
Although investors officially have until Dec 2 to respond, the better terms they will get by the early-bird deadline on Monday mean most investors are likely to make their decision by then.
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