Bank of America Securities reiterates New World Development's rating as "Underperform" with mixed views on perpetual bonds and bond exchange offers

Bank of America Securities research report indicates that New World Development (00017.HK) recently announced an exchange offer involving its existing perpetual bonds and bonds. The company plans to issue up to $1.6 billion in new perpetual bonds and $300 million in new bonds, implying a discount of 50% to 53% for the perpetual bonds and 17% to 21% for the bonds. From an equity perspective, the impact is mixed.

Bank of America Securities stated that positively, this exchange offer could reduce total liabilities by up to $1.9 billion and lower annual interest expenses by $44 million. However, according to the report from Bank of America’s credit research team, New World Development may need to conduct another liability management operation in 2026.

The main upside risk to Bank of America Securities' "underperform" rating for the group comes from potential capital injections from the parent company Chow Tai Fook (01929.HK) and other investors. Considering that New World Development may still need to delay the payment of dividends on the new perpetual bonds, Bank of America Securities believes that the likelihood of New World Development introducing new third-party investors to inject equity is low before completing another liability management operation.

Bank of America Securities noted that the new perpetual bonds and bonds are backed by the cash flow from the Hong Kong Victoria Harbour Cultural Hub project. However, Bank of America's estimates show that the total distributable income of the Victoria Harbour Cultural Hub in the fiscal year 2025 is slightly lower than the total interest and distribution obligations of the new notes. Although Bank of America expects retail rental income from the Victoria Harbour Cultural Hub to have upside potential in the fiscal year 2026, the credit research team at Bank of America anticipates that New World Development may defer the payment of at least part of the new perpetual bond dividends in the next 1 to 2 years. Bank of America Securities values the Victoria Harbour Cultural Hub at HKD 34 billion, which is 50% lower than New World Development's book value.

Based on a 64% discount to net asset value, Bank of America Securities sets a target price of HKD 4 for New World Development, reflecting a discount that is one standard deviation wider than the average level since 2018, to account for the uncertainty the company faces regarding the availability of bank loans due to high leverage; reiterating the "underperform" rating