Hong Kong Bankers on Edge Over $11 Billion New World Refinancing
New World Development Co., an embattled property developer controlled by one of Hong Kong's richest families, is aiming to complete one of city's largest-ever corporate refinancing deals with more than 50 banks by the end of June after pushing back an initial deadline for this month. As of last week, about 10 banks have agreed to terms while the rest are still talking.
Failure to reach a deal could lead to demands for immediate repayment. The repercussions would threaten both New World and many of the banks which are already suffering from a sharp rise in non-performing loans from commercial real estate. The stakes are so high that in many cases, the banks' chief risk officers have stepped in, people familiar with the matter said. Even chief executive officers of banks are closely monitoring the situation with frequent updates, the people added, asking not to be identified as the matter is private.
'A New World Development failure wouldn't break the system, but that destabilization could be contagious,' said Brock Silvers, managing director at private equity firm Kaiyuan Capital. 'A 'delay & pray' strategy would buy time while doing little to alleviate underlying risk to the company or Hong Kong's broader financial system.'
New World aims to secure HK$87.5 billion ($11.2 billion) in refinancing. It has commitments exceeding HK$20 billion from Bank of China Ltd., HSBC Holdings Plc and Standard Chartered Plc, local lenders Bank of East Asia Ltd., Fubon Bank (Hong Kong) Ltd., Hang Seng Bank Ltd., and French lender Credit Industriel et Commercial SA along with several other financial institutions.
New World Development did not respond to a request for comment.
The other banks are in the process of securing internal credit approvals. A deal of this magnitude can take time as credit committees scrutinize every detail, raising numerous questions to evaluate the risks involved.
Some banks are waiting for lenders with greater exposure to sign on before they can secure their own internal approvals, said the people. A couple of other top Chinese, Japanese and Singaporean banks are in the final stages of approving the loan, according to other people familiar with the matter.
'If one or two lenders in the syndicate are unwilling to commit, will the others in the syndicate be willing to take up the rest of the refinancing? If yes, the impact to the banking sector would be limited,' said Cusson Leung, chief investment officer for KGI Asia. 'If a majority of the lenders in the syndicate are unwilling to commit, it is much more destabilizing.'
New World is controlled by the family of Henry Cheng, an avid player of a Chinese poker game called Big Two, whose fortune is estimated at $22.9 billion. The developer has built many of Hong Kong's landmarks over the past several decades. Its trophy properties include the commercial complex located at the core area of Tsim Sha Tsui waterfront in Kowloon district and the 11 Skies commercial complex project next to the Hong Kong International Airport.
However, the developer has been mired in a two-year crisis of confidence amid mounting liquidity pressure. Home values in Hong Kong have fallen 28% from an all-time high in 2021 and have been hovering at the lowest levels since 2016 in recent months. Residential property development in Hong Kong and mainland China account for about half of the company's revenue.
Meanwhile, the city's office vacancy rate was near a historical high of 13.7% in April, while office rents saw the 36th consecutive month of declines since May 2022, according to real estate services firm JLL. New World's net debt rose to 96% of shareholders' equity as of the end of 2024, according to BI research, making it one of the most leveraged Hong Kong developers.
Investors are increasingly skeptical of the firm's ability to manage the debt burden, after it reported its first loss in 20 years for the financial year ended last June. Adding to New World's woes, it changed its chief executive officer twice in two months, including the surprise sidelining of Adrian Cheng, Henry Cheng's eldest son.
New World has multiple bond coupon payments due in June. The builder had total liabilities of HK$210.9 billion at the end of December 2024 and in June it has at least $116.6 million of coupon payments due, including on four perpetual notes. The company has pledged around 40 properties as collateral, including its crown jewel, Victoria Dockside, to get refinancing.
The developer spooked creditors about possible liquidity strains when it opted not to call a $345 million 6.15% perpetual bond before interest costs jump to over 10%. The price of this perpetual bond has plunged 28% to about 56 cents so far this month, the steepest monthly decline since January, according to data compiled by Bloomberg.
'The outcome of the loan refinancing is the near term catalyst for the bonds, as failure to refinance the bank loans now could lead to liquidity issues down the road,' said Leonard Law, a Singapore-based senior credit analyst at Lucror Analytics.
The downturn in property has saddled banks with non-performing loans. The Bank of China's Hong Kong unit, Bank of East Asia, Hang Seng Bank and HSBC are among lenders with the biggest exposure to the city's commercial real estate sector. Hang Seng classified about 15.1% of its HK$130.5 billion Hong Kong commercial property loans as credit-impaired at the end of last year, compared with less than 1% in 2023.
The tallies for HSBC and the Bank of China's Hong Kong unit are about 13.7% and 1.7%, respectively, according to the banks' disclosures. BEA has an impaired-loan ratio of 6% for its Hong Kong commercial real estate exposure, according to a Bloomberg Intelligence report, citing the bank's management. The banks did not respond to requests for comment.
Still, most observers expect the banks to ultimately reach a deal with New World. About 20% of Hong Kong's licensed bank loans were exposed to the property sector as of March, according to Jeff Zhang, a property analyst at Morningstar Inc. The concentration of risk means if lenders play hardball, it could end up backfiring. Failure to reach terms would damage everyone.
'Banks are generally better off to commit than to demand immediate repayment as NWD will not likely be able to repay all loans in the full amount,' he said.
More stories like this are available on bloomberg.com
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