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TEXT-S&P: KWG Property's Proposed Securities Have Equity Content
January 15, 2013 / 5:52 AM / in 5 years

TEXT-S&P: KWG Property's Proposed Securities Have Equity Content

(The following was released by the rating agency)

HONG KONG (Standard & Poor‘s) Jan. 15, 2013--Standard & Poor’s Ratings Services today said it considers the proposed issue of subordinated perpetual capital securities by KWG Property Holding Ltd. (BB-/Negative/--; cnBB/--) to have “intermediate” equity content. This means that we would treat 50% of the principal as equity and 50% of the distributions as dividends when calculating financial ratios. The equity content assessment is subject to our review of the final issuance documentation.

These securities are subordinated to all current and future senior debt of the company. KWG has indicated that it will use the proceeds for refinancing existing debt and to finance existing and new projects.

Standard & Poor’s does not rate the proposed issue. According to our criteria on hybrid securities and the proposed terms and conditions of the issuance, we would rate these securities at least three notches below the ‘BB-’ long-term issuer credit rating of KWG.

A key feature of the securities is deferral of interest perpetually at the company’s option but subject to restrictions regarding dividend payments and share repurchase. Other features of the securities include an increase in interest-rate spread by 25 basis points after 10.5 years and by an additional 75 basis points after 20.5 years, and issuer’s right to call (redeem) the securities in July 2018 and every six months thereafter. The securities also have a limited number of additional issuer call rights linked to the occurrence of certain prescribed external events, such as a change in taxation and accounting, and a change of control.

We believe the company will follow the replacement intention term of the proposed securities although the term is not legally binding. According to the term, if this instrument is called within 20.5 years after issuance, the company intends to replace it with an instrument that has equal or greater equity content than the proposed perpetual securities other than in limited circumstances.

If the company indicates any intention to deviate from its replacement intention, we may lower our assessment of the equity content on the securities to “minimal” from “intermediate.” This may affect the long-term issuer credit rating if the revision results in an increase in leverage more than we expect for the current rating. A “minimal” equity content means we would treat the principal of securities as 100% debt and the distributions as 100% interest expense.

RELATED CRITERIA AND RESEARCH

Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

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