According to a research report by BofA Securities, New World Development (00017.HK) recently announced an exchange offer involving its existing perpetual bonds and bonds. The company plans to issue up to USD 1.6 billion in new perpetual bonds and USD 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.
BofA Securities stated that, on the positive side, this exchange offer could reduce total debt by up to USD 1.9 billion and lower annual interest expenses by USD 44 million. However, according to a report by BofA's credit research team, New World Development may need to undertake another liability management operation in 2026.
The main upside risk to BofA Securities' 'Underperform' rating for the group comes from potential capital injections by the parent company, Chow Tai Fook (01929.HK), and other investors. Considering that New World Development may still need to defer dividend payments on the new perpetual bonds, BofA Securities believes the likelihood of the company attracting new third-party investors to inject equity before completing another liability management operation is low.
BofA Securities noted that the new perpetual bonds and bonds are secured by the cash flows from Hong Kong’s Victoria Harbour Cultural Hub project. However, BofA's calculations show that the total distributable income of the Victoria Harbour Cultural Hub in the fiscal year 2025 will be slightly below the total interest and distribution obligations of the new notes. While BofA expects retail rental income from the Victoria Harbour Cultural Hub to have upside potential in fiscal year 2026, BofA's credit research team anticipates that New World Development may defer payment of at least part of the new perpetual bond dividends within the next one to two years. BofA 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, BofA Securities has assigned a target price of HKD 4 for New World Development, reflecting a discount wider by one standard deviation compared to the average level since 2018, to account for the uncertainty regarding the availability of bank loans due to the company's high leverage; it reiterated the 'Underperform' rating.
