CWT International Limited
Updated Tear Sheet: CWTI Shows Substantial Asset Coverage Against Defaulted HK$1.4B Loan; Significant Credit Support for Remaining SGD Bond Despite Considerable Asset Stripping of Subsidiary; Possible Legal Recourse Against Upstreamed Liquidity
Mon 06/17/2019 21:49 PM
Relevant Items:
CWT International Limited Tear Sheet Update (FY18)
CWT International 2018 Annual Report
CWT Pte Ltd 2018 Financial Report
Reorg has updated the tear sheet for CWT International Limited after the release of its 2018 annual report. In this update, we have included the full set of standalone financials for its key Singapore-based subsidiary CWT Pte Ltd (“CWTPL”) for 2017 and 2018. CWTPL’s standalone financials will provide a clearer picture of credit support after assets were stripped in 2018 and significant liquidity was channelled upstream to repay structurally junior borrowings, namely the HK$4.4 billion acquisition financing and a HK$415 million convertible bond.
Defaulted HK$1.4 Billion Borrowing, Asset Coverage & Upstreamed Liquidity
The updated tear sheet includes a deconsolidated set of estimated financials (with CWTPL removed) for CWTI in 2018. While operating cash flows at the Hong Kong-listed company level have often been negative, and 2018 was no exception, the charged assets securing the defaulted HK$1.4 billion loan are likely to provide sufficient asset coverage against the outstanding amount.
Reorg’s analysis further considered the following estimated fair values of the charged assets; notably, over the last two fiscal years, HK$490 million of revaluation losses associated with investment properties had been recorded.
The value of certain golf courses in China held under Hillview Golf Development is not included in the asset coverage analysis as their fair value was not explicitly disclosed. The chain of ownership and attributable book value to CWT is as follows:
Given the defaulted HK$1.4 billion loan carries an interest rate of 17%, before inclusion of any default interest, the outstanding principal balance is likely to accrue rapidly. This would erode value for CWTI’s shareholders and any prospective lender looking to provide a refinancing facility to take out the HK$1.4 billion tranche.
Although CWTI, through CWTPL, monetised five of its Singapore warehouses in a HK$4.3 billion transaction last year, its operations and asset base remain substantial. A report from Reuters suggests that CWTI might not have been too keen to interfere with CWTPL’s commodity marketing and logistics business to avoid negatively affecting its value significantly, especially as CWTI was looking to sell CWPTL in part or whole.
Aside from the aforementioned warehouses sale, CWTI sold parts of its businesses in the engineering services and financial services segments for HK$300 million in 2018. Management has indicated further sales of other assets are possible as it streamlines its strategic focus.
Much of the asset sales proceeds were upstreamed to CWTI from CWTPL mainly through a S$624.7 million (HK$3.6 billion) intercompany loan that was subsequently impaired on CWTPL’s books upon an occurrence of an event of default at CWTI, triggered by the missed interest payment of HK$63 million on April 16. Another S$25.8 million dividend (HK$149.6 million) plus S$15.8 million (HK$91.8 million) of capital distribution were also upstreamed from CWTPL to CWTI in 2018.
In total, HK$3.87 billion of liquidity was upstreamed in 2018 to repay HK$4.8 billion of structurally junior debts, leaving a gap of around HK$930 million (before including CWTI’s standalone operating cash flow). The company entered into the HK$1.4 billion loan agreement on Sept. 29, 2018, which it has since defaulted on, as discussed above.
As of the end of 2018, we estimate approximately HK$110 million of unrestricted cash sits on CWTI’s deconsolidated balance sheet. This represents a somewhat thin buffer considering that CWTI, on a standalone basis, burns around HK$50 million of cash per month on average.
Potential Legal Recourse Against Upstreamed Liquidity
CWTI’s clarification on June 12 set out that its receivers are intending to dispose of the company’s subsidiaries that form part of the charged assets under the receivership, as previously reported by Reorg. The disposals may include various holding companies of CWTI as well as CWTPL. The receivers of CWTI have made written representations, referred to in CWTPL’s financial statements for Dec. 31, 2018, that their appointment did not result in a liquidation or winding up of CWTPL and further asserted that they did not anticipate their appointment would result in an interruption or disruption to CWTPL’s business.
CWTPL’s upstreaming transactions to repay structurally junior debt in priority to CWTPL’s S$100 million of 4.8% medium-term notes due March 2020 could make any future purchaser of CWTPL - who would either assume or guarantee the company’s existing debt obligations - consider closely the corporate rationale behind the upstreaming transactions, including options that could void the upstreaming transactions under certain conditions. Given that the upstreamed liquidity was used to repay junior debt, the MTN holders may also consider this rationale too.
As previously reported, the disposal of CWTI’s subsidiaries could amount to a change in control at CWTPL, which in turn could cause covenants in certain loan facilities of CWTPL and its subsidiaries to be breached and trigger cross-defaults in the loan facilities. However, if the lenders waived the change in control trigger and cross defaults, this could lead to a positive credit re-rating for CWTPL’s outstanding MTNs. Loan facilities booked on CWTPL’s balance sheet are over-secured on the basis of book values and lenders appear to be well-covered.
Under those two scenarios, either CWTPL (i) defaults on its debt and goes into an insolvency process like CWTI, or (ii) is acquired by a buyer. There may be various options for stakeholders to take actions against any fraudulent conveyance type transactions that can be established.
If CWTPL goes into insolvency, section 340 of the Singapore Companies Act the “Responsibility for fraudulent trading” provisions may apply if “in the course of the winding up of a company or in any proceedings against a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose.” An application can only be made by a creditor or liquidator and the provision implicates any person who was “knowingly a party to the carrying on of the business” in question as “personally responsible without any limitation of liability for the payment of the whole or any part of that debt.”
If CWTPL remains outside of insolvency, under section 73B of Singapore’s Conveyancing and Law of Property Act, there is - unlike under the Singapore Companies Act - a standalone provision dealing with fraudulent conveyances that does not require the company to be under a winding up procedure or involved in separate proceedings for a claim to be made.
S.73B deals with “Voluntary conveyances to defraud creditors voidable” on the basis that a transaction has been entered into “with intent to defraud creditors” and “shall be voidable” by any “person prejudiced.” However, it does not extend to any conveyance for “valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.” Mr Xu Haohao, a Chinese national, serves on the Board of Directors of CWTI and CWTPL. This could, under certain circumstances, be a complicating factor in relation to the issue of the “good faith” carve out detailed above and also potential conflicts of interest under the fiduciary tenet which is a central pillar to the directors duties regime.
It would appear that the upstreaming moves cash out of reach of CWTPL, and potentially reduces its ability to repay the MTN holders. Furthermore, the upstreamed liquidity has been utilized to repay creditors subordinated to the MTNs. Therefore, any potential buyer of CWTPL and the MTN holders may consider potential claims under s.73B, and the holders of the MTNs s.340, should the relevant legal requirements to make such claims be established.
CWTPL 2018 Operating Performance
With a weakened liquidity profile, CWTPL’s challenging operational conditions in 2018 for its core logistics and commodity marketing segments are unlikely to improve.
Management indicated that warehousing rates softened as more supply entered the market and demand was negatively affected by ongoing global trade tensions. According to a March 2019 research report by real estate broker, Colliers International, warehouse vacancy rates in Singapore remained high at 10.5% at the end of 2018 while average monthly gross rent decreased slightly:
The commodity marketing business was negatively affected by its concentrates trading business (mostly relating to non-ferrous base metals such as copper, lead, zinc). Management indicated that unforeseen events - such as smelter closures, a broad slowdown in China, a higher interest rate environment and mining supply disruptions - were to blame. Arguably, CWTPL experienced its worst year in 2018 in its commodity marketing operations over the last six years and appears to be operating at a reduced scale as inventories, receivables and revolving trade facilities stood at respective lows. This segment also recorded its first operating loss over the last six years:
We note that the Financial Services segment reported a 6.2x higher revenue in 2018 but operating profit, after adjusting for a one-time gain for the disposal of the equity stake in ARA-CWT Trust footed to S$10.7 million, comparable to 2017’s. This was perhaps due to increased competition as more Chinese brokerages competed in the market and resulted in fee compression. On the balance sheet, CWTPL booked significantly higher amounts of derivative assets and liabilities for this segment; most of these derivatives are commodity futures valued on a mark-to-market basis from brokers’ quotes.
CWTPL’s Balance Sheet & Credit Support
CWTPL’s balance sheet appears to be conservative and key line items tend to be marked-to-market, valued at amortised cost or valued at depreciated costs. While operating performance for key business segments suffered in 2018 (and prospects appear dimmed), CWTPL has generally been able to generate levered operating cash flow averaging S$94 million over the past 6 years.
After excluding revolving trade facilities (which tend to be self-liquidating against inventories and receivables as they are converted to cash), CWTPL’s adjusted net debt to equity ratio stood at around 0.19x. The following secured debts represent 82.4% of total debts booked on the balance sheet:
In particular, we note that CWTPL’s property, plant and equipment line item is likely to be dominated by the 2.4 million sq.f. Mega Integrated Logistics Hub (“MLH”) located along 47 Jalan Buroh, Singapore. The property had a S$342 million construction budget as stated in an April 2017 disclosure and an estimated S$474 million capital value after completion, which represents more than the entire 2018 PP&E line item on CWTPL’s balance sheet. The same disclosure also indicated that the MLH was not encumbered by a mortgage at that time, though there could be some construction financing associated with it. Based on CWTI’s first half 2018 management discussion, most of the warehouse space in the MLH had been contracted for/ committed by customers and the property’s full temporary occupation permit was obtained in November 2017.
Assuming the MLH is capitalized close to its budgeted construction cost of S$342 million, the additional S$130 million of off-balance sheet incremental capital value associated with this property could be used to raise additional secured debt. Assuming a loan-to-value ratio of 50%, an additional S$65 million could be raised against the MLH.
As previously covered by Reorg, Mapletree Logistics Trust (“MLT”) secured a right-of-first refusal against this property in 2018. CWTPL could try to conduct another round of sale and leaseback deals for the MLH with MLT, subject to any remaining minimum occupation period (“MOP”) and the rights of JTC (Singapore state-owned real estate agency administering the country’s industrial lands). CWTPL has held the leasehold of 47 Jalan Buroh from as early as 1989 and it has renewed this lease with the JTC in 2014 for another 30 years until 2044. Reorg has reached out to JTC to independently verify if the MOP continues to apply, and the agency has neither declined nor confirmed the applicability of the MOP.
Looking ahead, CWTPL has guided S$28.6 million of capital commitments ahead, a 57% reduction year over year.
CWTPL had S$275.1 million of unrestricted cash on its balance sheet at the end of 2018.
CWT International Limited Tear Sheet Update (FY18)
CWT International 2018 Annual Report
CWT Pte Ltd 2018 Financial Report
Reorg has updated the tear sheet for CWT International Limited after the release of its 2018 annual report. In this update, we have included the full set of standalone financials for its key Singapore-based subsidiary CWT Pte Ltd (“CWTPL”) for 2017 and 2018. CWTPL’s standalone financials will provide a clearer picture of credit support after assets were stripped in 2018 and significant liquidity was channelled upstream to repay structurally junior borrowings, namely the HK$4.4 billion acquisition financing and a HK$415 million convertible bond.
Defaulted HK$1.4 Billion Borrowing, Asset Coverage & Upstreamed Liquidity
The updated tear sheet includes a deconsolidated set of estimated financials (with CWTPL removed) for CWTI in 2018. While operating cash flows at the Hong Kong-listed company level have often been negative, and 2018 was no exception, the charged assets securing the defaulted HK$1.4 billion loan are likely to provide sufficient asset coverage against the outstanding amount.
(Click HERE to enlarge.)
Reorg’s analysis further considered the following estimated fair values of the charged assets; notably, over the last two fiscal years, HK$490 million of revaluation losses associated with investment properties had been recorded.
(Click HERE to enlarge.)
The value of certain golf courses in China held under Hillview Golf Development is not included in the asset coverage analysis as their fair value was not explicitly disclosed. The chain of ownership and attributable book value to CWT is as follows:
- Hillview Golf holds a 65% equity interest in Dongguan Hillview Golf Company, which in turn holds the onshore sport and leisure business segment of CWTI;
- 65% of the book value of the sport and leisure segment translates to HK$595.9 million at the end of 2018, which, assuming book value is a good approximation of fair value, provides a 0.4x additional cover against the outstanding defaulted loan;
- However, we note that the sport and leisure segment has reported operating losses in every year since 2015, except for 2017; and
- Dongguan Hillview was acquired in the middle of 2014 through a connected party transaction, according to this circular. The other 35% of Dongguan Hillview was then held by HNA Huanan.
Given the defaulted HK$1.4 billion loan carries an interest rate of 17%, before inclusion of any default interest, the outstanding principal balance is likely to accrue rapidly. This would erode value for CWTI’s shareholders and any prospective lender looking to provide a refinancing facility to take out the HK$1.4 billion tranche.
Although CWTI, through CWTPL, monetised five of its Singapore warehouses in a HK$4.3 billion transaction last year, its operations and asset base remain substantial. A report from Reuters suggests that CWTI might not have been too keen to interfere with CWTPL’s commodity marketing and logistics business to avoid negatively affecting its value significantly, especially as CWTI was looking to sell CWPTL in part or whole.
Aside from the aforementioned warehouses sale, CWTI sold parts of its businesses in the engineering services and financial services segments for HK$300 million in 2018. Management has indicated further sales of other assets are possible as it streamlines its strategic focus.
Much of the asset sales proceeds were upstreamed to CWTI from CWTPL mainly through a S$624.7 million (HK$3.6 billion) intercompany loan that was subsequently impaired on CWTPL’s books upon an occurrence of an event of default at CWTI, triggered by the missed interest payment of HK$63 million on April 16. Another S$25.8 million dividend (HK$149.6 million) plus S$15.8 million (HK$91.8 million) of capital distribution were also upstreamed from CWTPL to CWTI in 2018.
In total, HK$3.87 billion of liquidity was upstreamed in 2018 to repay HK$4.8 billion of structurally junior debts, leaving a gap of around HK$930 million (before including CWTI’s standalone operating cash flow). The company entered into the HK$1.4 billion loan agreement on Sept. 29, 2018, which it has since defaulted on, as discussed above.
As of the end of 2018, we estimate approximately HK$110 million of unrestricted cash sits on CWTI’s deconsolidated balance sheet. This represents a somewhat thin buffer considering that CWTI, on a standalone basis, burns around HK$50 million of cash per month on average.
Potential Legal Recourse Against Upstreamed Liquidity
CWTI’s clarification on June 12 set out that its receivers are intending to dispose of the company’s subsidiaries that form part of the charged assets under the receivership, as previously reported by Reorg. The disposals may include various holding companies of CWTI as well as CWTPL. The receivers of CWTI have made written representations, referred to in CWTPL’s financial statements for Dec. 31, 2018, that their appointment did not result in a liquidation or winding up of CWTPL and further asserted that they did not anticipate their appointment would result in an interruption or disruption to CWTPL’s business.
CWTPL’s upstreaming transactions to repay structurally junior debt in priority to CWTPL’s S$100 million of 4.8% medium-term notes due March 2020 could make any future purchaser of CWTPL - who would either assume or guarantee the company’s existing debt obligations - consider closely the corporate rationale behind the upstreaming transactions, including options that could void the upstreaming transactions under certain conditions. Given that the upstreamed liquidity was used to repay junior debt, the MTN holders may also consider this rationale too.
As previously reported, the disposal of CWTI’s subsidiaries could amount to a change in control at CWTPL, which in turn could cause covenants in certain loan facilities of CWTPL and its subsidiaries to be breached and trigger cross-defaults in the loan facilities. However, if the lenders waived the change in control trigger and cross defaults, this could lead to a positive credit re-rating for CWTPL’s outstanding MTNs. Loan facilities booked on CWTPL’s balance sheet are over-secured on the basis of book values and lenders appear to be well-covered.
Under those two scenarios, either CWTPL (i) defaults on its debt and goes into an insolvency process like CWTI, or (ii) is acquired by a buyer. There may be various options for stakeholders to take actions against any fraudulent conveyance type transactions that can be established.
If CWTPL goes into insolvency, section 340 of the Singapore Companies Act the “Responsibility for fraudulent trading” provisions may apply if “in the course of the winding up of a company or in any proceedings against a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose.” An application can only be made by a creditor or liquidator and the provision implicates any person who was “knowingly a party to the carrying on of the business” in question as “personally responsible without any limitation of liability for the payment of the whole or any part of that debt.”
If CWTPL remains outside of insolvency, under section 73B of Singapore’s Conveyancing and Law of Property Act, there is - unlike under the Singapore Companies Act - a standalone provision dealing with fraudulent conveyances that does not require the company to be under a winding up procedure or involved in separate proceedings for a claim to be made.
S.73B deals with “Voluntary conveyances to defraud creditors voidable” on the basis that a transaction has been entered into “with intent to defraud creditors” and “shall be voidable” by any “person prejudiced.” However, it does not extend to any conveyance for “valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.” Mr Xu Haohao, a Chinese national, serves on the Board of Directors of CWTI and CWTPL. This could, under certain circumstances, be a complicating factor in relation to the issue of the “good faith” carve out detailed above and also potential conflicts of interest under the fiduciary tenet which is a central pillar to the directors duties regime.
It would appear that the upstreaming moves cash out of reach of CWTPL, and potentially reduces its ability to repay the MTN holders. Furthermore, the upstreamed liquidity has been utilized to repay creditors subordinated to the MTNs. Therefore, any potential buyer of CWTPL and the MTN holders may consider potential claims under s.73B, and the holders of the MTNs s.340, should the relevant legal requirements to make such claims be established.
CWTPL 2018 Operating Performance
With a weakened liquidity profile, CWTPL’s challenging operational conditions in 2018 for its core logistics and commodity marketing segments are unlikely to improve.
Management indicated that warehousing rates softened as more supply entered the market and demand was negatively affected by ongoing global trade tensions. According to a March 2019 research report by real estate broker, Colliers International, warehouse vacancy rates in Singapore remained high at 10.5% at the end of 2018 while average monthly gross rent decreased slightly:
The commodity marketing business was negatively affected by its concentrates trading business (mostly relating to non-ferrous base metals such as copper, lead, zinc). Management indicated that unforeseen events - such as smelter closures, a broad slowdown in China, a higher interest rate environment and mining supply disruptions - were to blame. Arguably, CWTPL experienced its worst year in 2018 in its commodity marketing operations over the last six years and appears to be operating at a reduced scale as inventories, receivables and revolving trade facilities stood at respective lows. This segment also recorded its first operating loss over the last six years:
We note that the Financial Services segment reported a 6.2x higher revenue in 2018 but operating profit, after adjusting for a one-time gain for the disposal of the equity stake in ARA-CWT Trust footed to S$10.7 million, comparable to 2017’s. This was perhaps due to increased competition as more Chinese brokerages competed in the market and resulted in fee compression. On the balance sheet, CWTPL booked significantly higher amounts of derivative assets and liabilities for this segment; most of these derivatives are commodity futures valued on a mark-to-market basis from brokers’ quotes.
CWTPL’s Balance Sheet & Credit Support
CWTPL’s balance sheet appears to be conservative and key line items tend to be marked-to-market, valued at amortised cost or valued at depreciated costs. While operating performance for key business segments suffered in 2018 (and prospects appear dimmed), CWTPL has generally been able to generate levered operating cash flow averaging S$94 million over the past 6 years.
After excluding revolving trade facilities (which tend to be self-liquidating against inventories and receivables as they are converted to cash), CWTPL’s adjusted net debt to equity ratio stood at around 0.19x. The following secured debts represent 82.4% of total debts booked on the balance sheet:
(Click HERE to Enlarge)
In particular, we note that CWTPL’s property, plant and equipment line item is likely to be dominated by the 2.4 million sq.f. Mega Integrated Logistics Hub (“MLH”) located along 47 Jalan Buroh, Singapore. The property had a S$342 million construction budget as stated in an April 2017 disclosure and an estimated S$474 million capital value after completion, which represents more than the entire 2018 PP&E line item on CWTPL’s balance sheet. The same disclosure also indicated that the MLH was not encumbered by a mortgage at that time, though there could be some construction financing associated with it. Based on CWTI’s first half 2018 management discussion, most of the warehouse space in the MLH had been contracted for/ committed by customers and the property’s full temporary occupation permit was obtained in November 2017.
Assuming the MLH is capitalized close to its budgeted construction cost of S$342 million, the additional S$130 million of off-balance sheet incremental capital value associated with this property could be used to raise additional secured debt. Assuming a loan-to-value ratio of 50%, an additional S$65 million could be raised against the MLH.
As previously covered by Reorg, Mapletree Logistics Trust (“MLT”) secured a right-of-first refusal against this property in 2018. CWTPL could try to conduct another round of sale and leaseback deals for the MLH with MLT, subject to any remaining minimum occupation period (“MOP”) and the rights of JTC (Singapore state-owned real estate agency administering the country’s industrial lands). CWTPL has held the leasehold of 47 Jalan Buroh from as early as 1989 and it has renewed this lease with the JTC in 2014 for another 30 years until 2044. Reorg has reached out to JTC to independently verify if the MOP continues to apply, and the agency has neither declined nor confirmed the applicability of the MOP.
Looking ahead, CWTPL has guided S$28.6 million of capital commitments ahead, a 57% reduction year over year.
CWTPL had S$275.1 million of unrestricted cash on its balance sheet at the end of 2018.
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