New World’s bond coupon delay raises three questions

Shuli Ren, Bloomberg

In the bond world, not calling a perpetual is bad. But not repaying coupon? That’s way worse.

Hong Kong-based New World Development Co.’s decision to defer interest payments on four perpetual notes took investors by surprise. While this is by no means an action of default — a perpetual resembles an equity when business conditions get tough — it’s nonetheless a highly unconventional move.

As such, the real estate developer, controlled by the family empire of tycoon Henry Cheng, must clarify the confusion it has created among investors and bankers. There are three main questions worth asking.

First, why is New World deferring its coupon payments now? It’s negotiating with banks HK$87.5 billion ($11.2 billion) of refinancing in the hope of completing a deal by the end of June. As of Friday, lenders had committed more than HK$35 billion, or about 40% of the total. It’s worth noting that this deferral could save the developer only about HK1.8 billion annually.

By all means, not paying perpetual coupons is a credit-negative event, especially in the eye of Chinese banks, which might be stepping in to replace foreign lenders if the latter cut their credit lines. 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 and repay all interest. So why is New World rocking the boat when it should put on a performance and behave like a pristine investment-grade borrower instead?

This brings us to the second question: How tight is New World’s liquidity position? Companies with decent cash flow might want to keep paying coupons until the mega loan deal is sealed first.

Up to the company’s surprise announcement, investors could have been forgiven for thinking that the developer was troubled but not distressed. A recent plunge in Hong Kong’s benchmark borrowing rate is boosting demand for home purchases. Last week, a luxury residential project in the city’s southern district, which New World owns 50% of, pulled in more than HK$1 billion.

For the fiscal year ending June, Bloomberg Intelligence expects the company to beat its Hong Kong sales target of HK$11 billion by 10%. Business is picking up in mainland China as well. The developer has raised its sales target by 27% to 14 billion yuan ($2 billion).

Going forward, investors will be skeptical of New World’s liquidity position. As of 2024 year-end, it had HK$21 billion in cash. But the company does not disclose what percentage is being held in mainland China, which has various capital controls. In other words, money onshore may not be easily transferred to Hong Kong for debt repayments. In addition, is that seemingly large cash pile from five months ago still unrestricted?

Third, will there be any spillover? The Cheng family is probably trying hard to ring fence and ensure New World’s woes don’t affect other parts of its business empire, such as Chow Tai Fook Jewellery Group Ltd., or toll roads operator CTF Services Ltd.

But for the rest of us, the more pertinent question is whether Hong Kong’s reputation as a creditworthy community is still intact. Unlike mainland Chinese companies that don’t have a long track record and thus have to swallow stringent lending conditions, the city’s blue-chip names have for decades enjoyed lenient and cozy relationships with creditors.

Unfortunately, New World’s surprise coupon deferral is eroding that mutual trust and raising some very uncomfortable questions. [Abridged]

Courtesy Bloomberg/Shuli Ren