UPDATE 1: Modernland Noteholders Seek 100% Asset Coverage Over New Notes, Increase Asset Sale Redemption to 75% of Proceeds, Shorter Maturity for Due ‘24s

UPDATE 1: 3:10 a.m. ET 5/7/2021: Indonesian real estate developer PT Modernland Realty Tbk (MDLN) today, May 7, scheduled a call with noteholders of its $150 million guaranteed senior notes due 2021 and its $240 million guaranteed senior notes due 2024, with the discussion being centred on additional security collateralising the new notes, a higher rate of asset sales redemption to be carried out by 2023 and 2024, as well as a shorter maturity extension -- in particular for the due 2024s. Continue reading for our Asia Core Credit team's update on PT Modernland and request a trial for access to our analysis and reporting on hundreds of other high-yield, stressed and distressed credits in the region.

See Reorg’s coverage on Modernland’s restructuring proposal circulated by the company to noteholders HERE.

Additional Security

Two sources who attended the call told Reorg that the ad-hoc group as well as AJCapital, stressed during the call that they had sought 100% asset coverage as security for the new proposed notes in exchange for the due 2021 and 2024s.

The group also asked for security over Modernland’s Modern Bekasi project during the call, the sources told Reorg.

A particular point of contention for the noteholders was that while the noteholders were only being secured for up to 60% of their claims - based on the May 5 restructuring proposal tabled by the company’s advisor - a prospective investor providing an up to IDR 500 billion ($35 million) working capital to the company would be secured 2x against the bilateral facility (more below), the sources told Reorg.

The sources further explained that representatives of Borrelli Walsh present on the call, responded to this ask, stating that the company was not in a position to offer any additional security, and that the company’s initial position was to not make any security available to the noteholders at all. In addition, the working capital facility represents prospective new money so a more attractive set of terms will have to be offered, the sources said, citing Borrelli Walsh’s comments during the calls.

Borrelli Walsh further said that given the existing due 2021 and 2024s notes were unsecured, the security being offered in the May 5 proposal already sets an unfavourable precedent for the company for its prospective refinancing efforts, the sources told Reorg, adding that going back to the company to ask for even more security would make further negotiations challenging.

In response to a query by a noteholder, Borrelli Walsh stated during the call that everything that was not already pledged within its Jakarta Garden City (JGC) holdings was offered to the noteholders as collateral under the restructuring proposal, the sources said.

Borrelli Walsh also said during the call that there was an around 5% decrease in the valuation of the JGC landbank to be provided as collateral from 2019 to 2020, the sources explained.

Asset Sale Redemption, Working Capital Facility

As previously covered by Reorg, Modernland’s restructuring proposal to noteholders contains an undertaking to sell assets in order to raise:

• $40 million on or prior to June 30, 2023; and


• $160 million on or prior to Dec. 31, 2024

These asset sale proceeds are to be applied to fund the repurchase of the new notes. 50% of the proceeds raised via these asset sales are to be deposited by Modernland into an escrow account for the purposes of various forms of debt servicing of the new notes, including redemption of the new notes through a reverse Dutch auction.

The two sources who attended the call informed Reorg that the 50% redemption rate to be applied to the asset sales proceeds was a rate that both sides discussed when a working capital facility was not contemplated. AJCapital asked for this rate to be increased to 75% during the call, according to the same two sources who added that there were indications from Borelli Walsh that a higher rate might be agreeable.

In addition, sources told Reorg that asset sales may be carried out from the JGC landbank that is to be included in the collateral package and if this were to happen, Modernland will replenish the collateral pool such that asset coverage over the unredeemed new notes remains constant.

As reported, Modernland’s restructuring proposal included the following terms for a new working capital facility:

According to the same two sources, the security to be provided for the up to IDR 500 billion working capital facility will be separate from the collateral package to be provided to the new notes. While noteholders enjoy priority in providing the working capital facility, there are indications of interest from Indonesian banks onshore in providing the financing, the sources told Reorg.

The same sources explained to Reorg that proceeds from the new working capital facility are meant to repay Modernland’s existing IDR 150 billion bond that is coming due on July 7 and the remaining amount will be used for general working capital purposes.

The additional working capital could enable Modernland to increase the rate for which it normalises its development business and enable a faster pace of prospective deleveraging, sources pointed out to Reorg. Further, a non-timely redemption of the IDR 150 billion bond could increase the risk of an onshore PKPU proceeding and derail the company’s normalisation efforts because Indonesian banks might be less inclined to provide mortgage financing to end-buyers of Modernland’s projects.

According to the same sources, given a reverse Dutch auction mechanism is to be used to redeem the new notes, another significant area of uncertainty driving investors’ return and the company’s pace of deleveraging would be the purchase price that will be set in redeeming the new notes -- Borelli Walsh was non-committal in providing any guidance on such a purchase price during the call.

Maturity

During the call, sources told Reorg that noteholders also asked for a shorter maturity - particularly, for the new notes that are to be exchanged for the existing due 2024s - because of the relatively low cash and PIK coupon offered. Under the current restructuring proposal, the maturity of the due 2024 notes would be extended to April 30, 2028 while the due 2021 notes’ maturity would be pushed to June 30, 2025.

However, the same sources indicated - from the company’s perspective - Modernland wishes to tap debt financing from capital markets in the future and a shorter maturity could prevent them from doing so because it would increase the risks of a near-term liquidity overhang, presenting challenges to any prospective refinancing efforts.

Broader Inclusion

Sources also informed Reorg that some noteholders have expressed a preference to be included as part of a broader noteholder group so that cumulatively, 75% by value of the due 2021s and due 2024s can arrive at a consensus to pass the necessary schemes of arrangements through the Singapore Courts.

-- Nidhi Pandurangi, Junguang Tan

 

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Original Story 1:02 a.m. UTC on May 7, 2021

BREAKING: Modernland Due 2021, 2024 Bondholders Push Back on Security Offered in Restructuring Proposal, Raise Three Demands on Additional Security, Higher Asset Sale Redemption And Shorter Maturity Extension of Notes

Indonesian real estate developer PT Modernland Realty Tbk (MDLN) today, May 7, scheduled a call with holders of $150 million guaranteed senior notes due 2021 and its $240 million guaranteed senior notes due 2024, to garner feedback on the restructuring proposal previously circulated to the bondholders, according to three sources who attended the call.

Two sources told Reorg that the term-sheet containing MDLN’s restructuring proposal, as reported, represents a framework that is close to being agreed to by both sides. However, there are three main areas of pushback by noteholders and the financial advisor of the ad-hoc group, AJCapital:

• The security provided to the new proposed notes (to be exchanged for the existing due 2021s and 2024s) to be increased from the offered coverage of 60%;


• Increasing the asset sale redemption rate from the 50% against the $200 million underlying being offered in the latest restructuring proposal; and


• A shorter extension of the maturity of the new notes, in particular for those to be exchanged with the existing due 2024 notes.

As reported, the ad-hoc group consists of BlackRock and Eastspring Investments (Singapore) Limited.

See Reorg’s coverage on MDLN’s restructuring proposal circulated by the company to noteholders HERE.

MDLN’s capital structure is below: