Morgan Stanley: New World extends perpetual bond interest, providing short-term cash flow assistance but increasing long-term debt burden

Morgan Stanley issued a statement indicating that New World Development (00017.HK) announced a delay in the payment of interest on four perpetual bonds totaling USD 84 million (approximately HKD 656 million), originally due in December 2025, which will now accumulate to the outstanding balance. The company did not choose to redeem the USD 345 million bond due on May 16, with the interest rate jumping from 6.15% to about 10%. The company is negotiating with banks to seek refinancing for HKD 87.5 billion in loans, mortgaging most of its investment properties. The bank believes that the aforementioned measures will help cash flow reserves in the short term, but in the long run, these measures will increase the debt burden.

Morgan Stanley pointed out that New World Development chose to delay the payment of the coupon for two preferred stock securities (PCS) originally scheduled for June 9 and 10, and plans to delay the coupon for another two payments originally scheduled for June 16 and 22. The company did not redeem the USD 345 million perpetual bond before May 16. If the developer does not choose to redeem before June 16, the distribution rate will rise from 6.15% per annum to over 10% (referencing the U.S. 3-year Treasury yield of about 3.9%, an initial spread of 3.201%, plus a 3% adjustment spread). Assuming the distribution rate is reset to 10.1%, the annual payment will increase by USD 10.6 million (approximately HKD 82 million), accounting for about 3% of the rental EBIT for the fiscal year 2024.

According to foreign reports, New World has secured bank commitments for refinancing the HKD 87.5 billion loan. It is reported that the company has mortgaged its Victoria Dockside in Tsim Sha Tsui to obtain another loan of HKD 15.6 billion (approximately USD 2 billion). Morgan Stanley maintains a "Reduce" rating on New World Development with a target price of HKD 6.5