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Understanding the impact of corporate actions is necessary
when contemplating the right investment strategy. This impact is
driven by timely awareness, accuracy, and attention to detail. In
this blog, IHS Markit's Managed Corporate Actions™ team will
discuss some of the most dominant corporate actions announced each
month and the roles they take in the marketplace.
China Property Developers Continuing to Tread on Thin Ice
The introduction of China's Three Red Lines has sent a tremor
within the country's real estate industry. As China continues to
clamp down on debt levels and tighten its policies within the
Mainland, an enormous amount of strain has been placed on Chinese
property firms' short-term liquidity and expansion goals.
Before we go any further, let's dive into this
"Three Red Lines" policy:
In August 2020, China imposed the Three Red Lines policy on
several selected developers when they discovered growing debt
levels and rising land prices. As the country became home to some
of the topmost-indebted property developers, the People's Bank of
China and the Ministry of Housing took measures into their own
hands. They enabled "three red line" thresholds that must be passed
in case developers wanted to refinance projects:
A liability-to-asset ratio of less than 70%;
A net gearing ratio of less than 100%;
A cash-to-short-term debt ratio of at least 1.
According to the policy, developers' debt growth will be capped
according to how many thresholds they breach. If a firm can pass
all three, it can increase its debt by a maximum of 15% within the
following year.
So developers' overbuilt—what's the big
deal?
Well, before you ask that—you need to understand just how
much they have overbuilt by. Experts have found that over 90% of
Chinese families already own a house/apartment. The ratio has hit
that almost one apartment is currently empty for every four
apartments built. To date, it is said that there are over 65
million empty houses/units resulting from the over-build… "enough
to house the population of France." It remains unclear how and when
this supply/demand ratio went so-sideways [1].
How's this playing out in the world of Corporate
Actions?
Considering developers have until mid-2023 to meet the country's
expectations, Chinese real estate firms have been looking at
different mechanisms to postpone their payments and avoid
defaulting on their dollar-denominated debt and restructuring.
One corporate action in particular has seen a more recent spike
in the region, which one could only assume is a direct translation
to China's Three Red Lines... that being, Exchange Offers.
As we review our historical data on Chinese Exchange Offers
versus what we are seeing today, it is apparent that this 252%
spike must be stemming from somewhere. In 2018-2019, we found a
total of 27 Exchange Offers offering new notes, while in 2020-2021,
numbers rose to around 96.
Below are only a few more recent examples of some of the
Exchange Offers trend found within the past month:
Xinyuan Real Estate Co. averted a default for notes due October
15 where an exchange for new bonds and cash was agreed to by
bondholders [2].
China's Modern Land defaulted on notes that matured on October
25 resulting in a ratings downgrade by Fitch and Moody's [3].
Yango Group Co. Ltd received bondholder approval to issue a
debt swap of new notes for bonds due November 19 and have the
repayment extended to September 2022 [4].
Kaisa Group offered 400 million of debt maturing in December 7
for new 18 month notes to avoid debt restructuring [5].
For now, it seems that the debt crisis looming over the real
estate sector will continue into 2022. Our customers can expect
more Exchange Offers to be announced in the subsequent months as
developers seek investor consent to extend the maturity dates of
their debt obligations.
The light at the end of the tunnel remains dim for now, but as
with many crisis' that have occurred in the global economy, the
country continues to speak the Chinese idom "船到桥头自然直" (all will
be good).
The Move to T+1
After the 2008 financial crisis, the global industry began to
focus on reducing risk, achieving greater transparency, and
improving efficiency to establish a safer market environment. One
significant result from this initiative was shortening global
markets' settlement cycles from a T+3 to a T+2 period.
In the name of reducing counterparty risk and increasing global
settlement harmonization, Hong Kong and South Korea led the way
back in 2011 as they finalized their T+2 introduction. This then
kicked Europe into gear as they mandated a T+2 settlement cycle in
2012, and finally, by 2017, almost all markets globally, including
the US, had followed suit [6].
APAC is doing it again!
In November 2021, the Securities and Exchange Board of India
(SEBI) announced that the Market Infrastructure Institutions of
India (MIIs), inclusive of Stock Exchanges, Clearing Corporations,
and Depositories, have finalized their roadmap for the
implementation of the T+1 settlement cycle on equity securities.
Similar to what we saw back in 2011—it is evident that the APAC
region is leading the way. However this time, one major
differentiating factor is taking the industry for a loop. India
plans on implementing this approach through a phased-in
mechanism.
So, what does that mean?
The Exchanges of India have indicated that rather than
transferring all securities in one giant swoop, they will compile
an initial list of 100 securities set to make the first move,
followed by 500 securities each month until eventually all
securities trading on either NSE, BSE, and MSE are following the
T+1 settlement cycle period.
Although many different parameters are being used in creating
the list and order of these securities, one of the main components
for the rankings will be based on the daily market capitalization
averaged for October 2021. The bottom 100 stocks will first
transfer to T+1 starting February 25, 2022. Following the first
phase, the next 500 bottom stocks from the list will be introduced
on the last Friday of every month until all the stocks are
transferred over. Finally, the exchanges went so far as to address
that any new stock listed after October 2021 shall be ranked based
on the market capitalization of the average trading price 30 days
after commencement of trading [7].
Now, all we await is "Ready, Set… ACTION!"
The End of the Conglomerate Era?
In November 2021, the marketplace was hit with three strikingly
similar announcements from some of the largest global companies
worldwide:
General Electric (NYSE: GE) to split into 3 companies [8];
Johnson & Johnson (NYSE: JNJ) to split into 2 companies [9];
Toshiba (TYO: 6502) to split into 3 companies [10].
What primarily makes these announcements so interesting is all
three companies were once considered the leaders in their field (or
should we say fields) of business. It is for this reason each firm
has been dubbed with the "conglomerate" business framework.
However, it seems that each company is ready to try out a new
and more 'focused' business model. If you can recall, these
decisions look similar to the approach we saw Morton Salt take with
selling its airbag division, eBay, and its separation from its
payment processing company PayPal, Siemens, and its energy business
spin-off, IBM, and its IT services split last year in 2020... need
we name more?
These spin-offs allow these new independently traded companies
to function as free-standing entities, which enables them to
allocate capital more efficiently into opportunities that may
present themselves… especially mergers and acquisitions geared
towards their specific line of business. The once-popular business
terms "diversification" or even "bigger is better" are now being
replaced by "more focused" and "area of control" [11].
Let's break down the details for each expected
split:
US industrial giant, GE, will split into three separate units
focused on: Aviation (expected to be GE's new primary line of
business and serves as their current 'cash cow'), Healthcare, and
Renewable Energy and Power. Both splits are set to occur as
tax-free spin-off transactions; the healthcare branch in 2023 and
Energy in 2024. One cannot beg to question-- Is this another
attempt at a Reverse Morris Trust, which GE strived for back in
2019 with their transportation business? More details to come.
Healthcare giant, JNJ, will split their consumer-based products
(mostly known for Tylenol, Band-aid, Neutrogena) into a separate
company and keep their main branch focused on pharmaceuticals and
medical devices. Looking at the numbers to say, some might say that
is the most logistical outcome considering their single-shot
coronavirus vaccine recorded them a 13.2% increase in sales, as
opposed to their 4.1% increase in revenue brought by their consumer
products units in the same timeframe [12].
Expected for mid-2023, JNJ's split and business line decision has
been considered the riskier of the three company announcements as
it almost seems a bit "spur of the 2021 moment" [13].
Japanese industrial giant, Toshiba, sets to separate into three
separate companies:
Infrastructure Service Co.1, consisting of Toshiba's Energy
Systems & Solutions, Infrastructure Systems & Solutions,
Building Solutions, Digital Solutions and Battery businesses;
Toshiba, holding its shares in Kioxia Holdings Corporation
(KHC) and Toshiba Tec Corporation… primarily focusing on computer
memory manufacturing [14].
Due to its unprecedented transactions seen in Japan, this
more-radical decision is set to occur in the second half of 2023
and is estimated to cost around USD 87 million.
So is it the end of the conglomerate era?
One must make their own decision here. It may seem so with all
the news we have heard of in the past months/years. But it is
critical to remember the conglomerates that still stand today:
Berkshire Hathaway, Pepsico, Mars, Inc. Even consider Meta
Platforms, Inc. (formerly known as Facebook, Inc.) Or what about
the Walt Disney and 21ST Century Fox Merger in 2019, creating the
leading international media conglomerate? There might be more to
understanding the conglomerate era's position by investigating the
types of breakdowns and makeups than solely looking at the economic
timeframe in which we stand. More to come…
Ever heard of a Voluntary Liquidation?
When you hear the term "Voluntary Liquidation", one could
surmise that a company will undergo a liquidation in which
shareholders could have the ability to elect what they would
receive as part of their liquidating entitlement. However, as we
look at a more recent business case out of Mauritius, we find that
this is not necessarily the case.
So what does a Voluntary Liquidation
mean?
A voluntary liquidation is a self-imposed wind-up and
dissolution of a company that begins with its board of directors or
ownership deciding to liquidate. The board's resolution is
presented to shareholders for approval by at least a 75% voting
threshold for liquidation proceedings to move forward. As you can
see, the word "voluntary" in this context is not associated with a
shareholder's ability to elect their liquidation entitlement, but
rather their ability to voluntarily vote for or against the
decision to liquidate the company.
On the contrary, a compulsory or mandatory liquidation is a
formal insolvency procedure that involves lodging a petition by
involved parties, such as the company itself, creditors,
contributors, etc., for the winding up of its assets by a court
order. Upon hearing the application, the court may dismiss the
petition or make the order for winding-up. Upon the decision, the
court may appoint one or more liquidators who will be charged with
ascertaining and settling the liabilities of a company before
putting it into dissolution, which is the last stage of the
liquidation process.
Again, as we see through by each defined process, there is no
correlation in the mandatory/voluntary naming convention to whether
shareholders will receive a single liquidation payment or have the
ability to elect from more than one entitlement.
Reality Check:
Arden Capital Ltd. is a Mauritian diversified investment holding
company listed on the Johannesburg Stock Exchange, focusing
exclusively on Zimbabwe. The company has struggled from the
beginning to achieve liquidity for its shareholders and has failed
to attract any additional capital to grow its portfolio. The
company's portfolio now consists of only two remaining investments,
which are held by its wholly-owned subsidiary, Arden Enterprises
Limited (AEL), which include a 62.76% stake in African Sun, a real
estate and hospitality group, and a 100% stake in FML Logistics
(Private) Limited, which offers bulk petroleum product road
transport [15].
On November 18, 2021, the Board of Arden Capital proposed, after
a strategic review, that shareholders consider and approve a
Voluntary Liquidation of the Company at the Special Meeting of
Shareholders to be held on December 20. They will also be voting on
related transactions involving
the pro-rata unbundling by Arden Capital of its entire holding
in Arden Enterprises Limited (AEL) to shareholders through a
distribution in-specie, which is a Spin-Off event and will take
place before its liquidation and;
a Reduction of Stated Capital. Arden Capital plans to sell its
100% stake in FML Logistics, the proceeds from which will cover its
liquidation costs, settlement of Group debt, and other creditors [
16].
Holders will receive 1 share of AEL for every 1 share held as
part of the pro-rata unbundling (Spin-Off) transaction. There has
been no reference yet to what the actual liquidation entitlement
will be part of Voluntary Liquidation.
Our Managed
Corporate Actions Experts will continue to monitor future
announcements made to all the above postings to ensure the most
accurate and reliable corporate actions data coverage. Please reach
out for more information or questions.
Posted 30 November 2021 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Commodity Insights
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
