Refinancing assets in China is not straightforward. Four REITs and one property trust listed on SGX have China-only assets. They are CapitaLand China Trust (CLCT), BHG Retail REIT, EC World REIT (ECW), Sasseur REIT (Sasseur) and Dasin Retail Trust (DRT). Of these, DRT is a property trust styled as a business trust.
Sasseur owns four outlet malls in places such as Chongqing, Kunming and Hefei; ECW owns logistics assets including port logistics warehouses in Hangzhou, while DRT owns seven suburban malls in the greater bay area. Last year, BHG Retail REIT managed to refinance all its loans which matured on the same day. These loans are likely to mature during the first half of 2025.
In Sasseur’s latest presentation of its 1Q2023 business updates, its manager has been able to term out and stagger its debt profile by refinancing almost all its loans. In prior slides, all of the loans were in one tower maturing on the same day. Now, Sasseur’s $455 million of loans are staggered, with $60 fixed rate loan from the sponsor maturing in 2024 with an option to extend for a further 12 months on mutual agreement; $207 million matures in 2026, and $188 million matures in 2028. The 2026 maturity comprises $125 million, US$54 million and a $10 million RCF tranche. These are likely to be offshore loans.
The onshore $188 million (RMB925 million) loan is likely to be secured, while the offshore tranches are probably unsecured.
Inter-creditor agreements may slow down refinancing
Onshore lenders for Chinese S-REITs are likely to have inter-creditor agreements (ICA) with the offshore lenders. It appears increasingly, that onshore lenders’ loans are secured, and based on Chinese regulations, they tend to be amortising. Over time, the onshore loans get lower. This is why Sasseur’s debt as at Dec 31, 2022 was $488.3 million and debt as at March 31 was a tad below $455 million.
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Offshore lenders’ loans are unsecured, and they are usually bullet loans. This implies that the offshore lenders’ credit risk is higher than that of onshore lenders as the offshore lenders have no recourse or access to the asset in China. (Recall the difficulty of dollar bondholders of troubled Chinese developers accessing the assets.)
Hence the onshore lender is likely to be a Chinese bank, or the Chinese subsidiary of either a Singapore, Hong Kong or Malaysian Bank. For instance, Bank of East Asia China or Shanghai Pudong Bank in China will provide the secured onshore loan, while Bank of East Asia in Hong Kong or Shanghai Pudong Bank in Singapore provides the unsecured offshore loan.
Similarly for banks such as DBS Bank and UOB. ECW has announced in previous months such as June 2022, and latterly in January 2023, the offshore facilities were coordinated by DBS Bank and UOB, while onshore bank loans agreement were coordinated by DBS Bank China and UOB China Hangzhou Branch.
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For the time being, ECW’s loans are being extended subject to the disposal of a couple of properties to the sponsor by end-October. To show its commitment to the REIT, ECW’s sponsor has prepaid RMB333 million out of the RMB1.37 billion for the proposed divestment of the two properties. In addition, the sponsor provided personal guarantees to repay $75 million to ECW’s lenders by October 31.
ECW remains stressed. In relation to ECW's FY2022 financial report, its auditor included an emphasis of matter in respect of material uncertainty relating to the ability of ECW to continue as a going concern.
CLCT is different
CLCT’s debt profile is different. RMB loans are just 13% of total debt; 8% are notes; 79% of its loans are offshore SGD loans. It’s clear in CLCT’s presentations that offshore loans are unsecured, and onshore loans are secured. The notes are likely to be unsecured.
While there isn’t much difference in the cost of onshore loans versus offshore loans, CLCT cannot swap offshore loans for onshore loans because of the many restrictions in onshore loan regulation in China. The only method to get more onshore financing, is to divest an asset financed by an offshore loan, and acquire an asset in China financed by an onshore loan.
Of the Chinese S-REITs and trusts, CLCT’s debt expiry (of $1.978.1 million) is well staggered with around $200 million to $300 million expiring every year.
In addition, although CLCT is not rated, its parentage - it counts CapitaLand Investment as its direct largest unitholder and sponsor - enables it to get relatively lower cost of debt, including unsecured debt, compared to its peers. For instance, as at end-March, its weighted average cost of debt was 3.48%. This may be much higher that the weighted average cost of debt of 2.97% as at December 31, 2022. But it’s notably lower than BHG Retail REIT’s all in cost including amortisation of 6.2%, and Sasseur’s all-in cost including amortisation of 5.9%.
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Proposed MOU undisclosed till legal complaint filed
DRT has twin problems of refinancing its debt, and what is turning out to be disagreements between directors and shareholders of Dasin Retail Trust Management (DRTM), the trustee-manager. Indeed, it appears that at least two announcements were not disclosed promptly. These are a proposed MOU to acquire assets as part of a restructuring process, and the winding up petition for Sino-Ocean Capital which owns 70% of DRTM.
Market watchers were surprised when a press release on May 26 by Zhang Zhengcheng, a minority shareholder of DRTM and a major unitholder of DRT stating he had filed a claim in the High Court of the Republic of Singapore against Tan Huay Lim, an independent director of DRTM, revealed a hitherto unannounced proposed MOU.
In the complaint it emerged that there was a proposed MOU requiring DRT to buy assets in mainland China from a foreign seller. The complaint stated that the terms were “prejudicial to unitholders”.
Zhang said that the priority of DRT is to make an orderly disposal of one or more assets in order to repay part of the loans owing to the syndicated banks and agree with the syndicated banks on the restructuring of the syndicated facilities.
Previously, minority unitholders and investors in the market were unaware of such an MOU. Whatever the case, the MOU did not proceed due to a few reasons. Zhang says he was advised by Chinese counsel that the transactions contemplated under the MOU are illegal under Chinese laws. The properties recommended for purchase in the MOU are state-owned properties; it is illegal under the laws of the People’s Republic of China for private entities to directly purchase state-owned properties without going through an open and public bidding process, Zhang had stated.
DRTM released a statement saying that “a representative of the reputable Chinese entity indicated that while the reputable Chinese entity adopts a serious attitude towards the MOU, the terms of the MOU are subject to both internal approval and approval from the relevant authorities in China; the internal approval of the reputable Chinese entity is subject to (a) satisfactory due diligence results, (b) a suitable debt solution has been reached with all lenders and (c) the injected assets are approved by the DRTM and other relevant authorities, including SGX.
Responses to queries from the SGX revealed different accounts pertaining to the said MOU. For instance, SGX asked why the board of DRTM had made the statement: ‘The Lenders are concerned whether the CEO is acting in the interests of all stakeholders including the Lenders and if conflicts of interest are being managed appropriately.”
It turned out that the CEO of DRTM attended a meeting with Zhang “whereat the Lenders were informed of the intention to terminate the services of FTI”. FTI is the debt restructuring consultant that may have been involved in the MOU when the discussion was around the MOU being part of the restructuring.
On July 10, in replies to SGX, DRTM announced that DRTM “will continue to negotiate the terms of the debt restructuring with the lenders with the assistance of FTI, and explore the available options in relation to the restructuring exercise with the lenders”. Options include the disposal of the malls “an orderly and structured manner” or searching for “other potential strategic investors”.
Whether getting in a potential strategic investor is something unitholders may agree to remains to be seen. Unitholders of Manulife US REIT were clearly unhappy when its manager and sponsor were negotiating with Mirae Asset Global Investments for the latter to acquire the manager and a stake in the REIT via a preferred placement. The structure would have been very dilutive to unitholders, market watchers said. The transaction did not materialise and the REIT and its manager are in the process of divesting Phipps, one of its best assets, back to the sponsor.
Another Eagle?
It is unclear why DRTM’s proposed MOU with outside parties was not revealed to unitholders. Increasingly, some market watchers are looking to Eagle Hospitality Trust as a case study of how REITs and property trusts are liquidated as part of the process of changing a manager that is not appointed as part of a friendly M&A. DRT’s retail unitholders are concerned that Eagle’s experience could be repeated at its property trust.
Based on DRT’s FY2022 (for the 12 months to December 31, 2022) financial statement, the trust had a net property income of $47.2 million, down 31.7% y-o-y. The valuation of its assets fell by 20.8% y-o-y to $1.9 billion compared to the $910 million in debt. Hence, if DRTM divested a couple of its assets, it could attempt to refinance the remaining five assets, and attempt to “yield up” the properties. Unfortunately, it isn’t just a refinancing challenge that DRT and DRTM are facing.
Sino-Ocean Capital, which counts Chinese state backed Sino-Ocean Group Holding as an investor, is facing a winding-up petition in Hong Kong due to missed payments on a 6% dollar note. While winding up petition has been postponed to August. Sino-Ocean Capital owns 70% of DRTM via its wholly owned subsidiary New Harvest.
According to a statement by Zhang, when the matter of disclosure was raised at a board meeting on April 20 by Zhang and two other independent directors, Tan did not vote in favour of disclosure. Shortly thereafter, SGX queried DRTM over this matter which resulted in DRTM subsequently making the necessary disclosures on May 4.
The major shareholder of DRTM is facing a winding up petition in Hong Kong; the board proposed an MOU to acquire more assets without disclosing this to unitholders; and the trust has yet to sort out is refinancing issues. To top it all, onshore lenders and offshore lenders for Chinese assets usually have an ICA, slowing the refinancing process should all lenders not agree to the terms.
Maybe unitholders who plan to remove external managers by popular vote may need to rethink the costs of doing so. In Eagle’s case, DBS Trustee was tasked with finding a new manager, acting as guardian angel over the REIT during the interim, and appointing restructuring consultants, financial advisers and eventually liquidiators. The trustee does all the work, but is likely to bill the unitholders. Sometimes, this can run into millions.
