A bargain despite refinancing hurdles
What has happened?
Offshore loans extended for one year
Against the backdrop of rising debt levels and home prices in China, the government introduced a new policy in October 2020 to slow credit growth among property developers. Dubbed the “three red lines” policy, there are limits on debt-to-equity, debt-to-cash, and debt-to-assets growth levels. The new regulations resulted in a tightening of credit to property developers, and while EC World REIT (ECWREIT) is not in the residential property sector, lenders have become much more cautious in giving out property loans.
Earlier in FY21, ECWREIT was in discussions with its Sponsor in relation to a potential transaction to divest its entire portfolio, but as the transaction did not materialise, the discussions ended on 28 December 2021. ECWREIT had only managed to begin loan renewal negotiations thereafter, and the tightening credit market surrounding property-related firms was also one of the likely reasons for the delay in refinancing its offshore loans that were due at the end of May 2022. It was only on 1 June 2022 that ECWREIT managed to obtain an 11-month extension for its offshore loans, and the extension expires on 30 April 2023, together with its onshore loans
As part of the loan extension, the Sponsor took an undertaking to commence refinancing of the offshore facilities immediately and to also ensure that at least 25% of the outstanding facilities are repaid by 31 December 2022.
Onshore loans also extended on the same terms
Subsequently on 29 June 2022, ECWREIT announced the extension of its onshore loans to 30 April 2023. Similar to the terms for its offshore loan extension, the Sponsor also took an undertaking to commence refinancing of the facilities immediately and ensure that at least 25% of the facilities are repaid by 31 December 2022.
MOU for sale of two properties
The Manager has since entered into a non-binding memorandum of understanding (MOU) with its Sponsor to explore a potential divestment of Beigang Logistics Stage 1 and Chongxian Port Logistics. The bulk of the proceeds from the divestments would then be used to repay loans as stated in the loan extension undertaking.
Based on our estimates, the minimum amount of loans to be repaid by 31 December 2022 is c.S$176.9m (25% of total outstanding loans of S$707.6m). As the combined valuation of the two properties as at 31 December 2021 was c.S$432.8m, we expect the divestments to generate more than the required amount to pare down 25% of outstanding loans.
After accounting for taxes and transaction costs for the divestments (assumed to be 25% of the value), ECWREIT would have excess funds of c.S$150m after repaying the loans as stipulated in the terms of the extension of the loan facilities.