(March 20): Unwilling to cede control over New World Development Co, Hong Kong’s billionaire Cheng family is now betting on the revival of the city’s property market and mulling options like a public share sale to meet the embattled developer’s debt obligations.
After high-profile flirtations with investors including Blackstone Inc, the Chengs are now convinced that the property market rebound will gather pace, alleviating the pressure on them to strike a deal that would involve giving up a controlling stake, people familiar with the matter said.
An improving outlook for New World, one of Hong Kong’s four dominant developers, has also given the family, led by patriarch Henry Cheng, confidence to be more selective with investors, said the people, asking not to be identified discussing private deliberations.
One of the leading options is a roughly US$4 billion ($5.11 billion) share sale by New World, either to selected investors including the Chengs or to all shareholders on a pro-rata basis — meaning the family holding about 45% in the company will contribute about US$1.8 billion, the people said.
Talks on all proposals are preliminary and details including the investment size are subject to change, the people said.
The pivot comes as Hong Kong housing prices are forecast to climb as much as 15% this year and prime mall rents up to 5%, according to JPMorgan Chase & Co and CBRE Group Inc. That recovery would bolster the developer’s core business operations, which narrowly avoided default last year thanks to a record US$11 billion bank refinancing.
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“Residential market recovery will benefit New World’s earnings and liquidity profile,” said Jeff Zhang, an analyst at Morningstar Inc. “New World’s latest projects in Hong Kong Island and West Kowloon have been well received by local homebuyers, leading to stronger cash inflow.”
The Chengs were desperate for outside capital until the end of 2025. A major private credit lender at one point sought guaranteed returns of up to 20% in talks to inject liquidity into New World, according to people familiar. Meantime, Blackstone’s proposal entailed the family ceding its control of New World in exchange for US$2.5 billion from the asset manager.
Retaining control
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But it wasn’t long before the family backpedalled. Talks with Blackstone slowed as the family explores deals with other investors without ceding influence, Bloomberg reported earlier this month.
The Chengs have good reasons to bet on a bullish property market. New homes have been selling well over the past few months, allowing developers to raise prices for future projects. New World’s apartment sales for the six months ended December had reached more than half of its full-year target ended June. It still has more than 5,000 units of stock for buyers in the next few years, according to the company.
Still, de-leveraging would remain a lengthy process for the company with refinancing continuing to be the primary source of near-term liquidity replenishment, before the company funnels more sales proceeds to debt repayment, Morningstar’s Zhang said.
New World’s debt crisis stems from an ill-timed expansion that saw the developer rack up about HK$212.4 billion (US$27.1 billion or $34.64 billion) in total liabilities. Many projects it invested in didn’t come into fruition until after 2019, when Hong Kong’s economy and real estate market were battered by social unrest, Covid and global interest rate hikes. Last year, property prices fell to a nine-year low after shedding a third of their value in four years.
The resultant liquidity crisis unravelled the succession prospects of Adrian Cheng, Henry’s eldest son, leaving the door open for someone professional from outside the family to take the helm. As Henry worked to overcome the liquidity challenges, he even explored the sale of assets in the Rosewood Hotel Group, whose operations are led by his daughter Sonia Cheng.
Since the US$11 billion refinancing, New World has taken more steps to further strengthen its liquidity, allowing the Cheng family to wait till the property market turns. It secured a US$508 million loan backed by its crown-jewel asset in Hong Kong, and conducted a debt swap that trimmed about US$1.2 billion from the company’s debt pile.
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The company isn’t out of the woods yet. It continued to post losses in the six months ended December while its cash-to-debt ratio worsened. The group has also paused payments for dividend and some perpetual bond interests.
A partnership with external investors to shore up New World’s finances remains in the cards. The family’s talks with CapitaLand Group Pte Ltd and Ares Management Corp resumed earlier this year following a preliminary discussion last year, according to some of the people.
Representatives for Blackstone and Ares declined to comment. Spokespersons for New World Development and Chow Tai Fook Enterprises Ltd, the main investment vehicle of Hong Kong’s billionaire Cheng family, didn’t respond to requests for comment. A spokesperson for CapitaLand Investment Ltd, the group’s listed asset management arm, said the firm doesn’t comment on market rumours.
The Cheng family’s financial health could also cloud its funding plans. Its private investment arm is seeking to refinance a US$932 million loan due in June, after repaying another borrowing with its own cash last year amid a tough financing environment, Bloomberg reported this month.
“Maturity pressure is postponed rather than resolved,” said Barclays analyst Wilson Ho in a note this month. “The macro outlook has turned more favourable, but we believe it has not been totally in the clear. New World still has about one year to strengthen its capital structure ahead of its maturity wall.”
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