Hongkong Land plans way out for worried lenders
CREDITORS worried about Hongkong Land Holdings' welcome after 1997 have been offered a deal allowing them to opt out in three years - but forgoing a healthy slice of the interest payments if they do so.
The $1.5 billion exchangeable deal offers lenders $1.5 billion worth of transferable loan certificates (TLCs) maturing in 10 years.
Creditors can exercise the exchangeable option in three years, although a banker close to the deal denied that 1997 fears or nervousness about the Jardines name prompted the inclusion of the clause, which allows lenders to exchange their TLCs for short-term advance certificates with a one-year maturity.
Creditors exercising the option to opt out are penalised. While lenders who hold the TLCs for the full 10-year term receive a coupon of 80 basis points (0.8 per cent) over the six-month Hong Kong interbank offered rate (HIBOR), those who decide to exchange them have to settle for the short-term advance certificates' 25 basis points coupon.
The transaction is similar to a $2.05 billion 10-year deal SocGen arranged in March for Sun Hung Kai Properties.
Despite another clause which requires banks to seek Hongkong Land's permission before selling the TLCs, the loan is expected to be well-received because of the company's infrequent appearances in the market. Most of its borrowings were bilateral, making a syndication even more attractive, the banker said.
'They haven't been to the market for about 10 years,' he said. This increases its rarity value to bankers, as do its Central business district assets, one of which, The Landmark, is security for the deal.
'How many chances do you have to lend to a group like this?' he said. 'They [Hongkong Land] are pretty cash-rich. It's a fact. Even some bankers have been asking what the current rental rate is [on the Landmark and Exchange Square]. It doesn't take a genius to work out that they've got a very strong cash flow.' Hongkong Land was not a typical property company and the banks respected that, he said. 'Quality names clearly get well-supported. Hongkong Land is not a developer - it's a landlord.' He dismissed suggestions that the handover of the territory to Beijing in 1997 and the unpopularity of Hongkong Land parent Jardine Matheson Holdings were factors in the three-year option to switch out of the deal.
If political considerations were involved, the opt-out should occur before the handover, he said.
The other deal involving exchangeables was for Sun Hung Kai Properties and was originally for $1.5 billion but was increased. SHK Properties' transaction featured an exchangeable loan with transferable loan certificates and was for 10 years.
In the SHK Properties deal, the put clause recurred annually after three years. If borrowers exchanged their loan for a one-year note, they went from 80 basis points over six-month HIBOR to 30 basis points on the one-year note.
But the longer they stayed in the deal, the higher their all-in yield.
Analysing the SHK Properties deal at the time, Asian Credits newsletter basis point said it would appeal to those who were happy with the return for four years and who took a long-term optimistic view on the property market.
'If SHK's pricing falls over the next four years, an 80 basis point margin will be perceived as good even if fees are discounted, and the margin remains the same until the last year when the loan must be exchanged at 30 basis points,' the newsletter said.
'For the pessimists, the structure is less appealing; although it is a good four-year asset, banks that stay in longer get penalised if they decide to opt out.
'If at some point SHK's fortunes take a dive, banks have to wait a year to exercise the put and then get a 30 basis point final-year margin.'
