Update on Century Sunshine defaulted bonds

Background on Century Sunshine default

In 2020, Century Sunshine defaulted on its bonds (CENSUN 7.000% 03Jul2020 Corp (SGD)), with management attributing the outbreak of COVID-19 as a main driver, hurting demand and production of its fertilisers.

Following that, a restructuring plan (Scheme) was proposed and approved. These 2020 bonds have since been delisted on the SGX, and bondholders would receive a pro-rata share of the Scheme Consideration. The Scheme Consideration would consist of a few parts, including the: Term Extension Interest; Interim Payment(s); and/or Term Extension Repayment(s); and/or Early Repayment(s); and the Final Payment. 

Meanwhile, the Scheme Company itself primarily consists of three main assets:

1. Scheme Shares: The Scheme Company would receive 79,012,680 shares in Rare Earth Magnesium Technology Group Holding Limited (REMT) (HKEX:601). These shares will be gradually disposed of over time (up to 15,802,536 shares) to fund the Term Extension Interest.
2. Zhangzhou Land: This land may initially be pledged as collateral for bridging loan facilities which may be required for the Shandong Land referenced below. It will be disposed of only after August 2025.
3. Shandong Land: It is proposed that the land use will be changed from industrial use to commercial use under the Shandong government’s Relocation Plan, and its land value is expected to appreciate after this change. Hence, this land will be disposed of only after this change in land use.

To summarise:

• Most of the Scheme Company’s assets are in [2] and [3] above, but holders of the 2020 defaulted bonds should expect some time before these pieces of land can be sold to unlock their value. This is especially true for the Zhangzhou Land which may not be sold until after August 2025.
• The Scheme Shares in [1] will primarily be used to pay the Term Extension Interest which is capped at 5% and paid yearly. However, it is important to highlight that no amount is guaranteed on a yearly basis, depending on the actual proceeds from selling the shares relative to relevant costs.

About the Rights Issue

As referenced above, the Scheme Company holds shares in REMT. REMT has recently announced a rights issue on the basis of one rights share for every two existing share held on the record date, at a Subscription Price of HK$0.110 per Rights Share. As these REMT shares are part of the Scheme Assets, creditors are entitled to participate in the respective proposed rights issue if they wish (on a pro-rata basis).

We list the three options out below. Our team’s view is that Option 3 is the best option for investors.

Option 1: Subscribe for the Rights Shares

If you opt to subscribe for the Rights Shares, you will have to make a payment corresponding to the abovementioned Subscription Price of HK$0.110 per Rights Share. Following that, the resultant rights shares will be first issued in the name of the Scheme Company. Subsequently, the Scheme Company will enter into a bought and sold note and instrument of transfer with iFAST Financial to further transfer the resultant rights shares.

As in Option 2 (see below), those who opt for Option 1 should note the uncertainties relating to any fees that may have to be borne, and/or the timeline regarding said transfers. We do not think these uncertainties justify subscribing for the Rights Shares.

Another consideration for fixed income investors is whether they wish to undertake equity risks relating to REMT shares. We think that most of our investors into this defaulted bond should primarily be looking to get their monies back, not to make side-bets on whether REMT shares will perform well or otherwise. Hence, we do not think subscribing for the Rights Shares will be suitable for those who invested in the defaulted 2020 bonds.

Option 2: Dispose of (i.e. sell) the Nil-Paid Rights

If you opt to dispose of the Nil-Paid Rights (i.e. sell it in the market for cash), this disposal will be conducted by an independent agent. However, it is not guaranteed whether the Nil-Paid Rights can be disposed of, and/or what the actual disposal price and volume will be.

Apart from the uncertainty over this disposal, those who opt for Option 2 should note that they may have to bear relevant fees related to disposing / selling these rights. Fees may for instance include remittance charges. Considering the REMT rights shares are just HKD$0.110, we think there is a risk that the REMT rights themselves may be valued at a very low price – consequently, investors should consider whether any proceeds from disposing these rights will be sufficient to cover relevant fees and charges.

Finally, those who opt for Option 2 should note that considering the structure of the Scheme, the proceeds from disposing these Rights will first be held by the Scheme Administrators, with a second step required to transfer these proceeds to each investor. There is no explicit timeline given for the second step, bringing in another layer of uncertainty.

Option 3: Discard the Nil-Paid Rights

This means you will not utilise your pro-rata rights, meaning you will not participate in the rights issue. This will not affect your existing entitlement to the Scheme Shares, which will continue to be calculated on a pro-rata basis.

Essentially, this is the status quo option, as your entitlement to REMT shares will not increase (or decrease). As most of the Scheme Assets’ value are in the two pieces of land in [2] and [3] above, we think bondholders need not undertake additional uncertainties relating to this rights issue.

Summary

Our recommendation is Option 3: Discard the Nil-Paid Rights.

We think that the Options 1 and 2 (selling the rights; or subscribing for the rights shares) involve too much uncertainty in the entire process, particularly with regard to how much investors can potentially earn relative to the additional costs involved. Hence, we believe Options 1 and 2 are not suitable for the typical fixed income investor who is looking to simply recoup their monies.

For full-lot investors, you may make your decision by informing your iFAST representative regarding which option you intend to take up. For odd-lot investors on Bond Express, we will help to make a decision that will best serve bondholders’ interests.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in CENSUN 7.000% 03Jul2020 Corp (SGD) Trading without Accrued Interest. The analyst who produced this report holds a NIL position in the abovementioned securities.

Our podcast series, Yield Hunters, is available on Spotify, iTunes Podcasts and Google Podcasts. We share our thoughts on new bond issues and hold discussions on the fixed income space. Listen to our latest episode below and follow us!