The Board of Jinhui Shipping and Transportation Limited makes this update announcement further to the Company’s announcement dated 20 April 2018 (the “Announcement”) in relation to the Co-Investment in Tower A of One Financial Street Centre, Jing’an Central Business District, Shanghai, the PRC (the “Tower A” or previously named as “T3 Property”). Unless otherwise defined herein, capitalized terms used in this announcement shall have the same meaning as ascribed thereto in the Announcement.
The Co-Investor received updates from the Investment Manager on 19 and 26 May 2020 in relation to the status of the Co-Investment in Tower A of One Financial Street Center, Jing’an Central Business District, Shanghai, the PRC and option to be considered by all Tower A investors. The Investment Manager advised that the property market in China has been significantly impacted by prolonged US-China trade war, and the cities lockdown due to the outbreak of Coronavirus Disease 2019 (“COVID-19”). The Shanghai commercial real estate sector has entered a bear market as the supply-demand dynamic has shifted unfavorably which affect both capital value and rental offers. The Investment Manager advised that due to the tough real estate and capital markets, the property project in Tower A run into financial difficulties in closing the acquisition as banks intent to reduce its lending and the resulting funding gap which requires new equity injection, while it could be explored, is not economically feasible yet based on low projected return.
A similar situation applies to a sister-project in the property (“Tower B”) at the same location, which is owned by Tower B investors. The Investment Manager advised that approximately 50% of the purchase price pursuant to each of the Tower A and Tower B contracts has been paid through a combination of equity (30% of purchase price) and an offshore bridge loan (20% of the purchase price) for each tower. The bridge loan for each tower will mature by the end of November 2020. The remaining 50% of the purchase price of each tower was originally scheduled to be due at the end of April 2020 handover, so under the circumstances, on behalf of all of the investors, the Investment Manager negotiated verbally with the vendor of Tower A to extend the payment due date. Due to the tightening of the capital markets cause banks to reduce its lending and the difficulties in refinancing the offshore bridge loans, Tower A investors and Tower B investors may not able to close either Tower A or Tower B acquisitions and may run towards purchaser default situations. In the event of default, Tower A investors are contractually required to forfeit 20% of the Tower A’s purchase price, and same situations apply to Tower B investors.
The Investment Manager has proposed an option, subject to the consensus of all investors in Tower A and Tower B, to procure a new buyer to acquire 100% of either Tower A or Tower B or both and in the event that, if only one tower is sold, the proceeds will be used to pay down the existing loan of the sold tower, with the remaining proceeds rolled over for the purpose of acquiring the remaining unpaid-for-portion of the remaining tower. This will result in the remaining tower being owned collectively by both Tower A investors and Tower B investors. This roll-over proposal will require the virtually unanimous approvals of all Tower A investors and Tower B investors, and the interest of the remaining tower’s investors will be diluted by the amount reinvested by the realized tower’s investors.
Based on the information provided by the Investment Manager, in the roll-over proposal, the projected returns on roll-over proposal, compared with other scenarios, would maximize all investors’ chances at preserving the most capital, assuming the projected exit of the remaining tower will be in year 2025. When either Tower A or Tower B is being sold, the amount of remaining proceeds will be rolled over for the purpose of acquiring the remaining unpaid-for-portion of the remaining tower. The basis on which the proceeds will be reinvested shall be determined by a third-party auditor with an external valuer to determine the net asset value of the remaining tower.
If the Investment Manager is unable to obtain the required approval among the investors in Tower A and Tower B, or unable to procure a buyer for either of Tower A or Tower B, and bank financing nor new equity injection are not economically available, it would be very likely a default contract scenario would happen. Under this circumstance, the Investment Manager expects that the investors of Tower A are obliged to pay a maximum compensation of 20% of the purchase price of Tower A and this will result in a 74% loss on the invested equity for the Tower A investors. Accordingly, we expect an impairment loss on the Group’s Co-Investment in Tower A in the default contract scenario if the required approval cannot be obtained, and impairment loss of approximately US$7,400,000, being 74% loss on the committed equity investment of US$10,000,000, will be recognized in the second quarter of 2020.
As the proposed option deviates from the original term in the Co-Investment Agreement, the Investment Manager is seeking consents from all investors in Tower A or responses by 3 June 2020. Up to the date of this announcement, the Group is still considering the financial and commercial impact and has not decided on the consent to the roll-over proposal. We will update all shareholders of the Company on the consensus and investment update timely and accordingly.