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Breakingviews - Hong Kong is not New World's lender of last resort
HONG KONG, June 19 (Reuters Breakingviews) - A property giant's struggle to secure an $11 billion debt refinancing is keeping regulators and bankers in Hong Kong on edge, for good reason. A high-profile default of New World Development ( opens new tab would inflict a wave of pain on the Asian hub, echoing the crisis China Evergrande's ( opens new tab default precipitated across the border. There are some crucial differences, however.
To be sure, the pair are linked and alike in many ways. The property developers' founders were Poker pals, opens new tab. With a liking for high-stakes bets, their companies ended up the most indebted of real estate firms in Hong Kong and mainland China respectively.
Deprived of bank financing after Chinese President Xi Jinping launched a deleveraging campaign in 2020, Evergrande has since defaulted on $23 billion worth of offshore debt – the Cheng family which controls New World among the list of creditors, opens new tab – and was ordered into liquidation last year. Its now-ousted chairman Hui Ka-yan is in police custody for suspected financial crimes. Evergrande's problems were the tip of a borrowing iceberg that have engulfed every major developer on the mainland.
By contrast, New World is the only large Hong Kong developer experiencing a severe liquidity squeeze despite a 30% drop in residential and retail property prices since 2021. Its debt-fueled expansion, opens new tab under the leadership of Adrian Cheng, the founder's grandson, in a toppish market just before the Covid-19 pandemic, is largely to blame. Despite the blunders, New World can still afford luxuries Evergrande could only dream of: Support from banks.
That support is not complete, however. New World needs to win the backing of over 50 of the lenders invited to take part in a HK$87.5 billion refinancing deal by the end of June, Bloomberg reported last week, citing sources. It has 87% support so far, including from HSBC (HSBA.L), opens new tab and Bank of China ( opens new tab, ( opens new tab.
Details of the jumbo loan, opens new tab, including tenure and collateralisation, are unclear. With interest rates easing, some banks may be willing to give an important client breathing space and hope for a property market rebound. Yet some may decide to hold out on concern that the current downturn could be structural.
New World reported its first loss in two decades last year. The company will be profitable again in 2027, according to analyst forecasts compiled by LSEG, but net income will amount to just 4% of its 2019 level. It will also be hard for Hong Kong's market to rebound without China's economy firing up. Nor is the management team stable; the company is on its second CEO since Adrian Cheng stepped down in September.
By the end of 2024, total liabilities stood at $17.4 billion – a fraction of Evergrande's $332 billion as of June 2023. That means even if New World's debt woes worsen, local banks, mostly well-capitalised, can withstand the shock.
The city's biggest bank, HSBC, for example, had more than $33 billion in Hong Kong commercial property loans on its books at the end of 2024. Some $3.2 billion of that was already classified as credit impaired as of June last year. CEO Georges Elhedery told, opens new tab shareholders in February that future credit losses on it were unlikely to be big thanks to a high level of collateral, with loan-to-value ratios well above 50%.
Yet a big-name default could trigger cascading effects, opens new tab where homebuyers lose confidence, leading to another 7% drop in prices this year, according to S&P Global Ratings.
Land sale income often accounts for one-third of Hong Kong's fiscal income. The systematic importance of the real estate sector underscores why some local commentators think the government ought to come to New World's rescue, just as it did with a $28 billion bailout of carrier Cathay Pacific Airways ( opens new tab during the pandemic. Financial Secretary Paul Chan told legislators this month there is no such plan, though he added the Hong Kong Monetary Authority had set up a taskforce with banks to tackle the property sector's credit crunch.
New World is also active in the mainland, including the Northern Metropolis, a mega new town at the border of Hong Kong and Shenzhen that is planned to deepen the integration of the two cities. A capital injection from its state-owned business partners is possible, although it will beg the question why a Hong Kong giant is deemed too important to fail while the likes of Evergrande were not.
The answer lies in the gap between the two different administrative systems. Beijing is willing to implement radical policy changes to wean China's $18 trillion economy off a heavy dependence on real estate. Hong Kong, often lauded as the world's most expensive city, has leaned on property for growth for decades and official efforts to find alternative engines to spur GDP have not yielded much. That means boom-and-bust cycles come thick and fast in China, so do the rise-and-fall of property tycoons like Hui.
Hong Kong's property magnates are in a different class. They have amassed a fortune. Henderson Land Development ( opens new tab, for one, may have made costly expansion plans akin to New World, yet the blue-chip developer's founder, Lee Shau-kee, who passed away in March, made shareholder loans, opens new tab worth nearly $8 billion to stave off a debt crisis at his listed flagship in 2023.
The city's senior bankers will know how deep the pockets of their megarich clients run. Hong Kong can weather a default by New World but, before it comes to that, the Cheng family, which owns 45% of the company, could step up as a lender of last resort. That will be a fitting outcome to this tale of two property crises.
