HPL announces SGD 5y bonds at FPG of 5.10%

About HPL

(Unless otherwise stated, dollar values are in SGD, and growth rates are on a year-on-year (YoY) basis. HPL’s financial year ends in December each year, and the article will generally refer to FY23 data referring to the period ending in December 2023. Market data will generally be as of 22 April 2024.)

Hotel Properties Limited (HPL) plans to issue new SGD 5y bonds at a final price guidance of 5.10%, for accredited and institutional investors only. These bonds will be unsubordinated and secured.

The issuer is unrated, and the new issue is also expected to be unrated. Proceeds from this new issuance will be used to refinance existing borrowings and working capital requirements. Proceeds may also be used for the redemption of its 4.40% perpetuals (HPLSP 4.400% Perpetual Corp (SGD)) which is first callable on 22 October 2024.

HPL operates in the hospitality segment, with interests in 38 hotels; it owns hotels, resorts, and shopping galleries in 15 countries. In addition, it is also a property developer with a presence in residential and commercial property. It is currently listed on the SGX with a market capitalisation of $1.9b.

HPL’s Managing Director is Mr Ong Beng Seng. Based on an SGX announcement in July 2023, he appears to be under an ongoing investigation with the Corrupt Practices Investigation Bureau, with no charges filed. The company’s Nominating Committee has determined for now that he is suitable to continue as Managing Director. Investors should note the ongoing uncertainty and consider how this may affect its bond prices, though there appears to be no direct impact on HPL’s financials for now.

Financial highlights

In FY23, HPL reported a solid +22.2% growth in revenues to $642m, primarily driven by decent growth in its main ‘Hotels’ segment, as the company benefited from the continued recovery in international travel. On a geographical level, revenue growth was primarily seen in Singapore and ‘the rest of Asia’, with revenue in its key Maldives segment remaining fairly flat ($228m in FY22 to $227m in FY23). Overall, HPL’s operating profit grew by +29.2% to $147m.

In addition, HPL also marked a sizeable $645m net fair value gain in its (Singapore) investment properties in FY23, much higher than the $77m gain recorded in FY22. This fair value gain more than offset the weak performance in the share of results of associates and jointly controlled entities, which saw a loss of -$56m due to fair value and impairment losses from properties in London.

HPL delivered a sizeable increase in profit after income tax, from $34m in FY22 to $555m in FY23. To summarise, HPL’s profitability improved mainly driven by the net fair value gain in Singapore investment properties highlighted above, with its operating performance contributing as well but to a smaller extent.

Credit highlights

HPL’s cash (and equivalents) balance (excluding deposits pledged to banks) rose slightly from $88m in FY22 to $91m in FY23. Its solid operating performance (see previous section) was a key positive driver, alongside the $88m from the disposal of Ming Arcade completed in May 2023. However, HPL also saw cash outflows from financing activities, primarily due to the increase in finance costs (-$53m in FY22 to -$94m in FY23), and the repayment of borrowings (-$361m in FY23 compared to -$229m in FY22).

Meanwhile, total borrowings (short-term and long-term) also decreased slightly from $1,584m to $1,514m. Coupled with the mild improvement in its cash position, its net debt position did improve slightly from FY22 to FY23. Coupled with the YoY increase in total assets and total equity, its net-debt-to-total-assets ratio improved from 39% to 34% in FY23, while its net-debt-to-total-equity ratio improved from 77% to 59% in FY23. Nonetheless, we highlight that HPL remains highly leveraged as a whole.

Notwithstanding the strong fair value gain in investment properties seen in the previous section, a significant proportion of its investment properties appear to already be mortgaged to banks to secure credit facilities. HPL reported that $1,308m of its properties were pledged in this way as of FY23 (about 99% of its investment properties which were valued at $1,320m). We note that this gives HPL little room should it need to acquire additional borrowings in future.

In terms of its liability profile, HPL reported that it has about $298m in liabilities due within 1 year, $1,711m due within 2 to 5 years, and $282m due after 5 years. In addition, HPL reported that they (the Group) have made corporate guarantees of $642m due earliest within 1 year, though they expect no amount to be payable under the current arrangements.

As a whole, we think HPL is a higher-risk issuer considering its fairly high debt levels and limited room to acquire more secured financing. Nonetheless, near-term default risks (within 1 year) remain manageable for now with most liabilities due in the 2 to 5-year period, and we think HPL’s success in managing its credit profile will hinge on its ability to generate profits and positive cashflows in the years ahead.

Thoughts on new issue

Investors should note that this new issue is only available to accredited and institutional investors. It also comes with typical call options which are only applicable in a change-of-control scenario or in the event of a cessation or suspension of trading in HPL’s shares.

We compare this new issue with outstanding bonds from Shangri-La and CapitaLand Ascott Trust, which are hospitality names we previously flagged as potential beneficiaries of a travel recovery (Table 1). One clear difference is the significantly higher yields available from HPL-issued bonds, compared to bonds from the two other issuers. We attribute this once again to the fairly levered profile of HPL. Comparing the new issue with other outstanding HPL bonds, we also note that while its outstanding 2027 and 2028 bonds technically have higher indicative yields of over 5.4%, these 5.4%+ yields may not be achievable in practice given the thin trading volume of those bonds.

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We also compare the new issue with bonds from another high-yield issuer: Oxley Holdings Limited. This issuer is the guarantor for OHLSP 6.900% 08Jul2024 Corp (SGD). While both are highly leveraged issuers, we note that they are structurally different companies: HPL is primarily a travel-themed issuer with significant revenues from hotel operations, while Oxley is primarily a property developer dependent on ongoing demand and sales from its properties. Consequently, we expect HPL to have slightly better prospects considering tailwinds from the ongoing travel recovery globally, as well as our expectation of slightly less lumpy revenues from HPL’s operations on a relative basis.

Looking ahead, HPL appears poised to continue benefiting from the ongoing travel rebound, and such a scenario could help its broader profitability and credit metrics. We think this bond is best suited for investors with a higher risk tolerance (considering its credit profile seen previously), who are looking for higher yields over many other travel or hospitality-themed issuers, and/or who want to gain some exposure to a continued travel recovery.

Table 1: Comparison against peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in OHLSP 6.900% 08Jul2024 Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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