City Development - Successful refinancing, but increases company's involvement

Successful refinancing of a land-acquisition loan for South Beach removes some risk, but has seen City Developments (CDL) provide debt and (potentially) increase its equity stake. The stock already appears to be pricing in a strong recovery in the Singapore property market, limiting potential upside. The banks’ willingness to refinance a lesser amount than was originally made available to the project is another reminder of the weakness in the commercial property sector.

South Beach refinanced. City Development’s (CIT SP - S$9.1 - U-PF) 33%-held joint venture project, South Beach, has successfully re-financed its S$1,200m debt. The loan was originally taken to finance the project’s S$1,688m land-acquisition cost. A consortium of commercial banks is providing S$800m of the S$1,200m refinancing. This is less than the S$1,200m that the banks provided when the loan was first taken. The rest of the refinancing is funded through the issuance of S$400m worth of five-year secured notes convertible into equity in the project, with S$195m of these taken by CDL itself. The balance is being taken up by the HK-based unlisted property group, Nan Fung. The refinancing cost or convertible price related details have not been disclosed.

One of the better solutions. Investors had been worried about the success of this refinancing as the land transaction for this rather large project (project cost at S$2.7bn) was done at the peak of the property market. This refinancing structure is one of the better solutions, as CDL avoids taking the project on its balance-sheet (would have increased reported gearing substantially), and the project value has not be written down.

Higher CDL involvement. We note that this refinancing was possible with CDL having to increase its involvement in the project, currently by way of providing debt, and later by potentially increasing its equity stake, should the debt be converted into equity. Interestingly, the other two equity partners in the project, El-Ad Group and Dubai World, have not subscribed to the convertible note.

Reiterate Underperform rating. Overall, we reaffirm the view that CDL’s stock is already pricing in a strong recovery in the Singapore property market, limiting upside potential. See our Where is the upside note of 4 June for more details. That the banks are willing to refinance a lesser amount than what was originally made available to the South Beach project, is just another reminder of the weakness in the commercial property business.

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