When the Hang Seng Index and property prices were on their way up during the handover, Lo Yuk-sui did what many second-line property players were doing: he geared up for expansion. Last year, Mr Lo, through the three listed companies in his Century City group, was estimated to have invested more than $6 billion in the Hong Kong and overseas real estate and hotel markets. On top of that, his firms made investments in troubled Chi Cheung Investment and New China Hong Kong Group - investments which collapsed in value and prompted Mr Lo's lenders to cut credit lines to his empire. Last Wednesday, Mr Lo revealed the extent of the group's financial difficulties, announcing that holding company Century City International Holdings had received demands from certain lenders for the repayment of $537.6 million in loans. Its 68.1 per cent owned property arm Paliburg Holdings also has debts, including a US$60 million floating-rate note due on Friday. Overall, the debts owed by Century City and Paliburg to financial institutions - including Century City's contingent commitment under various guarantees and contingent liabilities have reached more than HK$8 billion. In an attempt to keep his empire afloat, Mr Lo said Century City was 'acting responsibly' to sell assets, including a substantial stake in Paliburg, which has been a key income source for the Century City group, and had appointed merchant banks to advise the group firms. This followed an earlier announcement that Paliburg was seeking to sell a significant stake in its 74.8 per cent owned hotel arm Regal Hotel International Holdings. Concerns about the financial health of Mr Lo's empire triggered a 66.9 per cent dive in Paliburg shares on Thursday. On the same day, Century City fell 22.7 per cent and Regal shed 9.09 per cent. Mr Lo's problems epitomise the difficulties being faced by smaller property groups which expanded aggressively during the boom in property and stock markets last year and have been left vulnerable by the downturn in property prices. Highly leveraged and supported by a limited recurrent income base, their investment property reserves and shareholder equity have shrunk, prompting lenders to reduce credit facilities. Nomura Securities analyst Anthony Lok believes the Century City group's problems could just be the start as banks tighten lending policies. 'More could be coming,' he said. Since taking control of Paliburg and Regal, which was formerly owned by his father Lo Ying-shek's Great Eagle (Holdings) in the mid-1980s, Mr Lo has built up his billion-dollar empire through a series of acquisitions and restructurings. His aggressive corporate nature emerged in the latter part of that decade when Regal, which has hotel interests in Hong Kong, the mainland the United States and Canada, took advantage of the slump in the US hotel and real estate sectors. Its more recent hotel investments have included the HK$2 billion hotel at Chek Lap Kok airport and the US$102 million acquisition of the United Nations Plaza Hotel in New York. To finance its ambitious expansion, Regal arranged a HK$4.6 billion unsecured loan in September last year, raising its gearing ratio to 60 per cent. At Paliburg, gearing is estimated to have risen above 50 per cent following the purchase of a HK$5.5 billion luxury home site in Stanley in a consortium with Regal and red chip China Overseas Land and Investment at the peak of the market in June last year. Paliburg and Regal together own 70 per cent of the project, which has an estimated development cost of HK$8 billion. During the year, Paliburg also took control of Chi Cheung Investment and teamed up with Century City to have a large involvement in Tsui Tsin-tong's New China Hong Kong Group. That included taking full control of New China Hong Kong's financial services arm in September and buying New China Hong Kong's stake in a Chengdu expressway through a sale of Paliburg shares earlier this year. Analysts say those investments were the prelude to the group's present troubles. Last month, Paliburg announced a HK$400 million provision to cover losses incurred by Chi Cheung. That came a week after Chi Cheung shares plunged a dramatic 87.6 per cent in one day after an investor failed to settle a purchase of Chi Cheung shares. One analyst said lenders began to pressure Century City to sell assets when most of the group's new investments ran into trouble. Century City said Paliburg and Regal had attracted some interest from potential buyers although no names have been identified. Some analysts have pointed to cash-rich companies such as privately run Nan Fung Development as a possible interested party. Rumours in the market last week suggested Hongkong Bank, Hang Seng Bank and other key lenders have agreed to provide a loan extension for the group. Analysts said creditor banks would be unlikely to want to liquidate Century City and cause possible panic in the market. One creditor involved in Paliburg's US$60 million floating-rate note due on Friday said her bank was informed that Paliburg was arranging a loan to repay the note but no details would be finalised until early this week. Analysts believe Mr Lo will be able to overcome his problems with some help from creditors. But his group's aggressive nature will clearly be a thing of the past.
