Forterra Trust (formerly: Treasury China Trust)

[Boon]

Thanks PekingDuck for sharing the feedback from FT.

From page 103 of AR 2013:

“To minimise the Group’s exposure to adverse interest rate movements on its US$ denominated floating rate loans, the Group has entered into the following hedging arrangement:
• Interest rate swap for the notional principal amount of US$135.0 million on a bank loan for The Place, effective from 26 January 2012 to 27 January 2014.”

Yes, the last swap got expired in January this year – contrary to FT’s clarification, that swap was NOT arranged at overall loan portfolio level but was designated specifically to bank loans for The Place only.

So between 27 January and 14-August this year there was no hedging in place.

Since the notional principal amount has been reduced from USD 135 m to 100 m – I don’t think there would be much difference on overall amount of protection they are trying to lock in - whether the IRS has been arranged at overall loan portfolio level or at specific loan level,

The ownership structure of the assets is such that:
Each PRC asset is owned by a separate PRC entity which is in turn owned by a separate intermediate offshore SPV holding company (in HK, Jersey or BVI) – which is in turn owned by CREO in Jersey – Which is in turn owned by FT in Singapore.

The SGD 676 million adds up to about the total bank borrowing for all the Shanghai assets. And to my understanding, these bank loans are secured by legal mortgages over each specific property – I wonder why there exist these cross default terms among these loan agreements in the first place?

If the cross default terms are unavoidable among existing loans – inevitably, default on one loan would affect other loans.

To me, IRS is an “optional” or “add-on” – by accepting “failure in payment obligation of IRS to trigger cross default terms of existing loans” as a term in the “add-on” is simply a bad practice, from the perspective of risk management – is this another “unavoidable”?

On one hand, the IRS serves to reduce interest risk exposure, but on the other, it has increased the “cross default” risk exposure.

That said, what is the likelihood of FT defaulting on its IRS or bank loan payment obligation under NF’s Management ? That probably explains why the counter parties of the IRS have inserted a termination clause in the swaps should NF cease to own the Trustee Manager and/or 25% of Forterra common shares, as pointed out by G&F.

(vested)

[PekingDuck]

I find it very worrying that it has taken more than 4 months to uncover a significant mis-count in the vote for resolution 3 at the AGM - essentially a 13% swing which defeats the proposal. Leaving aside the massive mistake made by the proxy agent (are we still using them..?), this questions the standing of the board in making the proposal in the first place. In any typical listed company situation with proper governance and codes of practice, this would be a vote of no-confidence in the board surely..? A resounding defeat for what they are proposing. Any thoughts..?

[cfa]

Are SGX and MAS aware of this issue ?

[greengiraffe]

Cannot trust the jokers at this company especially in the light of the ongoing woes with China property mkt...

[thefarside]

A resounding defeat for what they are proposing. Any thoughts..?

I think they are proposing up to 50% share issuance limit (to existing units), of which up to 20% could be to existing non-shareholders. The blanket approval sought would enable them to do either placement, or issue convertible instruments etc that will result in up to 20% of additional units issued.

Some institutions probably found the blanket to be a bit too big... all things considered, and got together to shoot down the last one. You can see that a little more than 100 mil shares voted against the resolution, out of approximately 170 mil held by the big guys (out of 250 mil > 1 mil blocks) based on end Dec-13 report and 10-Mar-14 shareholdings.

[holy grail]

I thought most institutions has a policy by default to vote against a blanket mandate? no?

[Boon]

REDEMPTION OF THE FORUM BONDS
http://infopub.sgx.com/FileOpen/Announce...eID=315086

1) The Forum CB had been redeemed as expected as it was not in the money for bondholders to convert.
2) Total redemption amount =SGD 88.4 million
3) As at 30-June-2014, FT has cash of SGD 124.8 million and positive OCF.
4) Wondering why there was a need to borrow in the first place to redeem the Forum CB – though the borrowing is only for 6 months but the interest rate is still high at 10% - and it was borrowed from an affiliate of NF.
5) Isn’t it a controversial deal, considering that the HHM loan had recently been refinanced at around 5.5% ?

(vested)

[thefarside]

You can't possibly drain all the cash from the company just to repay something like this, given their debt level. With the long list of lenders they have, some will probably require them to maintain a certain level of cash as working capital to meet loan covenants for some of the term facilities.

This (latest) loan is supposed to be only temporary until they get their Shanghai property fully up and running. As it stands, the start date has been repeatedly pushed back - and the amount of leverage is still growing. Forterra will issue shares / whatever if they are allowed to do so but with the shares mandate having been shot down it remains to be seen how they will raise new capital to get through this period.

Also you should note that DSCR is now well below 1.0, when you compare Net Property Income vs Interest Cost.

As for comparing with the HHM loan, I suppose if they could raise new loans at 5.5% they would do so.

[PekingDuck]

Boon , bonds are unsecured so paying a premium. This is a short term facility to tide over to 2015 when we have a further $400m of loans (on the Place) plus some RMB to refinance, no doubt will be looking to roll this into a new consolidated loan? Borrowing from NF affiliate hopefully reduced the fees for securing the loan - plus allowed it to be unsecured. Makes sense not to pay out two thirds of our cash balance - with rental revenues at all time low, we are draining our cash each Q to pay the finance costs on outstanding debt. This won't reverse until Q2/3 2015 at a guess, depending on occupancy of the Place and any discounts/rent free periods offered to attract tenants. I can't see anything material supporting the SP between then and now - perhaps news on finding a CEO but I emailed IR last week and they were still searching.

[Boon]

HHM loan had been refinanced with increased borrowing (additional RMB 56 million and USD 17.6 million, increased borrowing equivalent to about SGD 33 million) at about 5.5% interest rate.

Since the original proceed from the issuance of the Forum CB had been used for the purchase of HHM - logically, the increased borrowing of additional SGD 33 million should be used towards the redemption of the Forum CB, IMO.

Otherwise, what did the management do with the increased borrowing of SGD 33 million for the HHM?

Cash & cash equivalent at 30-Jun-2014 = SGD 124.8 million.

Repayment of Forum CB = SGD 88.4 million

Cash left = 124.8 + 33 – 88.4 = SGD 69.4 million, assuming no short term borrowing.

Allow QUARTERLY finance cost of SGD 10 million each for 3Q2014, 4Q2014 and 1Q2015

Cash left at the end of 1Q2015 = 69.4 – 30 = SGD 39.4 million

Gross revenue for 1H2014 = SGD 28.466 million

With gross revenue at all-time low (meaning operating activities at all-time-low hence working capital requirement should be also at all time low) before the launch of TP1 & TP2 in Dec 2014 - how much working capital does FT really need?

If one were to look at the previous financial statements of FT, there had been occasions where the liquidity situations were MUCH tighter, – and it didn’t appear to have breached any of the loan covenants then.

Having set aside SGD 30 million to cover interest payments, I think SGD 39.4 million as working capital should be enough to last through till end of 1Q2015

With pre-commitment of TP1 & TP2 of above 80% as at 30-June-2014 and launching of TP1 and TP2 in December 2014, revenue and hence cash flow would improved significantly in 1Q2015.

In summary, my views on the short term borrowing remain unchanged as before.

That said - assuming I am wrong and there was a need for short term borrowing - how could the management prove that there was no better alternative other than borrowing (unsecured) from NF's affiliate at 10% interest rate ?

(vested)