MENU

Helping You Understand Corporate Debt through Hongkong Land Holdings

calculate

Real estate investor, developer, and manager Hongkong Land Holdings (SGX: H78) announced earlier in the day that it has issued US$400m worth of 10-year notes (a.k.a. debt) through a wholly-owned subsidiary.

The company’s corporate-action gives me a nice opportunity to use it as an example to shed some light on corporate debt.

The interest rate

With any debt instrument that a company issues, one of the most crucial aspects investors should note is the amount of interest the company’s paying. That’s because interest expenses can directly affect a company’s profits.

In fact, investors in the conglomerates Jardine Matheson Holdings (SGX: J36) and Jardine Strategic Holdings (SGX: J37) should also be concerned about the interest rates of the debt-deals that Hongkong Land makes. Hongkong Land’s a subsidiary of the two conglomerates and changes in its profits would also affect their corporate results.

So, coming back to Hongkong Land’s new US$400m notes, lenders would receive an annual coupon payment of 4.625%, meaning that interest expenses on these notes would amount to US$18.5m annually.

A quick check on the company’s finances for the last 12 months shows revenue of US$1.55b, so an additional US$18.5m of interest expense on top of the current amount of US$93m would likely not be too hard for it to handle.

The proceeds

While it’s not always the case, Hongkong Land’s notes are a little unique in that it’s being priced at 99.328% of the US$400m face-amount. This means that lenders are actually lending only US$397.3m to the real estate outfit.

Commodities trader Olam International (SGX: O32) also offered a similar deal once on  Dec 2012 by offering US$750m in bonds that was priced at 95% of the issue price; Olam’s thus getting only 95% of US$750m, or US$712.5m, before all relevant expenses are deducted.

The maturity dates

For companies with outstanding loans on their balance sheet, the maturity date of each individual loan is important. That’s because a company may run into financial risks if a large amount of debt needs to be repaid in a narrow span of time, and those risks are especially pronounced in a period where credit-availability is low. All else being equal, as an investor, I would prefer to see maturity dates that are well spread-out across time to lower such risks.

With Hongkong Land’s new US$400m notes, it would be up for repayment in 10 years, or in 2024. Based on the company’s latest financials (as of 30 June 2013 and excluding the US$400m notes), this is what the company’s repayment schedule looks like:

Due Date

Amount

Within a year of 30 June 2013

US$852.4m

Bank loans due more than a year after 30 June 2013

US$1,000.6m

Notes due 2015

US$297.5m

Notes due 2017

US$41.7m

Notes due 2019

US$103m

Notes due 2020

US$315.3m

Notes due 2021

US$68.0m

Notes due 2022

US$584.6m

Notes due 2025

US$656.3m

Notes due 2026

US$38.5m

Notes due 2027 to 2040

US$404.2m

Total Debt

US$4.36b

Source: Hongkong Land Holdings’ earnings for second quarter of 2013

From the table above, we can see how the company has cleverly placed the repayment for the new US$400m notes on 2024, which was a year that did not have repayments due previously. This can help prevent the build-up of financial risks, by ensuring that maturity-dates of various loans remain well spread-out, even if the company’s total debt load has increased.

The credit ratings

Not every company’s debt-instruments are rated by credit-rating agencies, but for those that do, it also pays watching for changes (if any) in the ratings given, even if such ratings could be taken with a slight pinch of salt.

In Hongkong Land’s case, the new US$400m notes are given A2 and A- ratings by Moody’s and Standard & Poors, respectively. The A2 and A- ratings are usually reserved for debt-instruments that are at lower risk of defaults.

Negative changes in credit ratings would likely mean higher interest payments for the same loan in the future. In addition, lower credit ratings might also mean that the company’s financial footing has deteriorated, which is not something investors would like to see.

Foolish Bottom Line

Of course, one debt deal offers only a small glimpse into a company’s much larger financial picture. But once you understand the fundamentals behind a debt deal, it gives you the foundation to assess the financials of different companies in your quest to ferret out profitable investment opportunities.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.