New World Development’s Perpetual Dance With Its Bankers

(Bloomberg Opinion) — If there’s a task you’re not obliged to do, but it’s expected nonetheless, will there be consequences if you choose not to? 

This is the question Hong Kong real estate giant New World Development Co. has to deal with. Last Friday, the company did not issue a notice to call back a $345 million perpetual bond, the deadline if it wants to redeem on the first reset date. As a result, the coupon rate will be stepped up to more than 10% from 6.15%, going by the current Treasury yield. 

New World has about $4.5 billion in perpetuals outstanding, and investors are facing the possibility that they won’t get paid anytime soon. In early June, the builder will have the option to defer interest payments on all its perpetuals, noted UBS Group AG.

This is not an action of default. When times are good, a company is widely expected to redeem a perpetual on the first reset date, and it will resemble a plain-vanilla bond. But if business conditions get tough, the issuer can choose not to call, or even defer all coupon payments, making it look more like an equity. As a result, auditors tend to recognize these instruments as equity, not debt. Cash-strapped New World has done no wrong here. 

But perception matters. New World, controlled by the billionaire Cheng family whose business empire spans from jewelry retail to real estate, is in the process of securing mega bank loans to ease its liquidity strain. It has received around HK$20 billion ($2.6 billion) commitments for a HK$63.4 billion refinancing facility, Debtwire reported on May 16. It’s seeking an additional loan of HK$15.6 billion, using crown jewel asset Victoria Dockside that houses Hong Kong’s luxury mall K11 Musea as collateral. The company’s decision not to call its perpetuals “could potentially impact current refinancing negotiations with the banks,” said UBS in a May 19 note. 

But will it? There are few precedents in Hong Kong, and the results are mixed. In May 2022, insurer FWD Group Holdings Ltd., owned by “Superman” Li Ka-shing’s younger son, decided not to call a zero-coupon $750 million perpetual note issued by a subsidiary that operates in Southeast Asia, citing corporate reorganization and an impending initial public listing. Richard Li managed to get away with it, receiving a ratings upgrade later in the year and issuing more bonds since. On the other hand, Hong Kong-listed Road King Infrastructure Ltd. has yet to recover from deciding not to distribute its coupon on a 7.75% perpetual last November. 

With New World, how Chinese banks perceive the no-call might be the key. In March, authorities instructed Industrial and Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. to examine New World’s risk exposure and suggested they could replace foreign lenders if the latter cut their credit lines, Octus Intelligence reported. 

The developer will have a lot of explaining to do. On the mainland, most perpetuals are issued by creditworthy state-owned companies, such as big banks and industrials, which habitually redeem at the first reset date. As a result, it will be a culture shock for mainland bankers to witness New World, which got investment-grade ratings from Japanese firms last October, not to conduct — to them — a routine operation. 

Whether a perpetual is an equity or debt has been long debated by bond traders. Now it is loan bankers’ turn. Who knows? Just like the Li family’s FWD, New World might face few consequences. After all, it is a flagship brand from one of Hong Kong’s most prominent billionaire families. 

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.

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