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Are International Healthway Corporation's bonds a speculative buy?
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Are International Healthway Corporation's bonds a speculative buy?

From exchange filings today, Oxley Real Estate Holdings has announced plans to extend a S$55m convertible loan facility to International Healthway Corporation (IHC). We highlight the details of the proposed deal and what this means for IHC's bonds.

What's happening?

From exchange filings today, International Healthway Corporation (IHC) announced that it has entered into a non-binding agreement with Oxley Real Estate Holdings along with its CEO Mr. Ching Chiat Kwong and Deputy CEO Mr. Low See Ching, with regards to proposed convertible loans of an aggregate sum of S$55m. We highlight the key terms of this proposed loan and what this means for the company's bonds.

Key details of the proposed convertible loans

The convertible loans consist of two separate loans, with the first loan facility of S$5m to come from Oxley Holdings' CEO and Deputy CEO, and the second loan facility of up to S$50m to be extended from Oxley Holdings. The key indicative terms of the loans which the parties have in-principle (subject to shareholder approval from both companies) agreed to are:

1) They shall have an interest rate of 6% per annum, to be accrued on a daily basis on the outstanding principal of the loans and paid by IHC to the lenders on the last day of each month;

2) The lenders shall have the right to convert to existing shares of IHC, or subscribe for new IHC shares at the price of S$0.06102 over a period of two years from the date of having obtained the necessary approval of the shareholders of both companies.

As part of the loan agreement, IHC would have to grant a first right of refusal in favour of Oxley Holdings in respect of the joint development of existing properties owned by IHC, and shall procure that the new loans are secured by the IHC's assets.

New loans part of refinancing plans to meet redemption of 2017 bonds

The proposed new loans is one positive news for IHC, which has been in the news recently for the wrong reasons following troubles in its Australian business as well as its recent shareholder tussle, which resulted in changes in the company's board of directors. We note that the proceeds of the loans will likely be used to redeem the IHCSP 7.000% 27Apr2017 Corp (SGD)s, with a principal outstanding amount of $50m. This gives some comfort to investors concerned over whether IHC could successfully execute the proposed refinancing plans for its Japan assets to unlock funding for redemption of the upcoming maturing bonds.

While the S$5m granted by Oxley Holdings' executives can be drawn down immediately, the remaining S$50m of loans extended by Oxley is not a done deal yet as it requires the fulfilment of several conditions, which centres on successfully securing the requisite approval of each company's shareholders. However, we think that there is a high likelihood that the deal will obtain the necessary approval from shareholders of both companies. It would be logical for IHC's shareholders to approve this deal given that it presents a much needed lifeline for the company to tide over its liquidity problems. The deal would also be a boon for Oxley's shareholders, noting that it could potentially own up to 32% of IHC if the loans are fully converted into the company's shares, allowing the company to become a major shareholder of IHC at below its current market value. Furthermore, the preferential treatment for joint developments with IHC (by virtue of the ROFR) gives Oxley future development opportunities to grow its earnings.

Refinancing risks not completely abated

Despite that, we note that there are still some key risks to the company. This include the uncertainty of whether there were any events of default or redemption events which have occurred under its Medium Term Note Programme recently (under which the 2017s and 2018s were issued, which could make both the IHCSP 7.000% 27Apr2017 Corp (SGD)s and IHCSP 6.000% 06Feb2018 Corp (SGD)s (along with its other bank loans which may contain cross-default provisions) due immediately, adding further strain to IHC's liquidity profile. We note that an event of default may have occurred as a result of the appointment of receivers over the company's Australian subsidiaries and properties.

Also, as stated in our previous article, a change of shareholding event may have taken place with the recent reduction of Fan Kow Hin's stake in IHC from 23% to 13.4% (as reviewed in recent exchange filings on 7 Feb 17). Under the terms of its MTN programme, a change of shareholding event occurs when Fan Kow Hin, Aathar Ah Kong Andrew and Jong Hee Sen and their immediate family members cease to own in aggregate at least 30% of IHC shares. Prior to Mr. Fan's share sale, recent exchange filing suggests they collectively own around 32.5% of IHC. We note from the IHC's update to shareholders that it is currently ascertaining whether these material events have occurred, and have signalled their intention to engage and seek consent from noteholders on a way forward, which could include a waiver of any event of default or redemption events.

Are IHC's 2017 bonds a speculative buy?

We think that this latest development is a credit positive event for IHC's bonds, which have been trading at distressed levels, with the IHCSP 7.000% 27Apr2017 Corp (SGD)s and IHCSP 6.000% 06Feb2018 Corp (SGD)s quoted at indicative ask prices of 75 (YTM: 171% ) and 70 (YTM: 42% ) respectively, and sporting spreads of a hefty 3777bps. In our previous update on IHC in late January, we opined that the recent changes in IHC's board of directors may constitute a turning point for the company's bonds. With the announcement of the proposed convertible loans, which is likely to go through, we are further convinced that a default scenario is greatly mitigated (notwithstanding the risks that remain), with an investment in the 2017 notes giving investors a potential cash return of around 34.3% if successfully redeemed in April. Investors looking for a longer tenor exposure to IHC may also consider the IHCSP 6.000% 06Feb2018 Corp (SGD)s, with a successful redemption of the upcoming 2017s serving as a catalyst for some narrowing of the firm's credit spreads, possibly leading prices to around mid-80s over the near-term.

 

The Research Team is part of iFAST Financial Pte Ltd.

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