Hong Kong Lifeline Buys Cheng Family Time to Save New World
It was a Wednesday evening in late September and analysts covering New World Development Co. were getting antsy. The cash-strapped Hong Kong developer was late to report its earnings, and executives hadn't shown up to a scheduled briefing. Behind the scenes New World was scrambling to hammer out a deal that, when announced hours later, would give it a crucial lifeline.
Hong Kong's Airport Authority agreed to waive billions of dollars in rent the company had committed to pay for its struggling 11 Skies project near the airport, alleviating its debt burden. In return, the Airport Authority would fully take over the HK$18 billion ($2.3 billion) mega mall-and-office complex -- and get an option to buy a significant chunk of the developer's shares at a steep discount.
The agreement came with a key condition: the founding Cheng family must remain New World's largest shareholder. The unusual deal shows how far Hong Kong authorities are prepared to go to stabilize one of the city's biggest property developers as New World faces nearly $11 billion of debt coming due as early as next year. It buys the billionaire Cheng family more time to shore up a company that posted a record $3.6 billion loss in its recent fiscal year. New World will also give HK$3 billion in cash and services to the Airport Authority as part of the agreement.
"The deal highlights New World's economic and policy relevance to Hong Kong, particularly as the government pushes ahead" with an ambitious plan to develop a new area in the northern part of the city that needs support from developers, said Gary Ng, senior economist at Natixis. "Further financial pressure on New World could increase restructuring or default risks."
Representatives for New World and the Cheng family didn't respond to requests for comment. The Airport Authority declined to comment beyond its earlier announcement on the 11 Skies agreement, which said the project paves the way for further development of the airport area. The 11 Skies agreement also gives the Chengs breathing room to act on New World's capital structure -- until late 2029. As part of the deal, the Airport Authority can buy 750 million New World shares -- about a 30% stake -- from the family's investment arm Chow Tai Fook Enterprises Ltd. within three years for HK$2.25 billion, which amounts to about a roughly 43% discount to the developer's current share price.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing