China-based e-commerce and port logistics REIT in EC World REIT (SGX:BWCU) will be holding an extraordinary general meeting (EGM) on Thursday, 07 September 2023, at 10.00am in Suntec Singapore Convention & Exhibition Centre (Meeting Room 325-326) to seek unitholders’ approval for the following ordinary resolution:
“To approve the supplementary agreement in respect of the proposed divestment (including the long-stop date).”
I have gone through the circular dated 16 August 2023, the day which the EGM was announced, and in this post, you will find a summary of the most important points to take note of in this circular (which I have compiled for the benefit of those who do not have the time to go through it):
What Does the Supplementary Agreement Entail?
It provides for, among others, the following:
i. Long-Stop Date Extension (to 31 October 2023):
Reason behind this is because the purchasers are still in the process of obtaining the relevant credit approvals from a group of PRC lenders in relation to their financing for the divestment, and are unable to complete the divestment at this juncture.
The purchasers’ financiers will be able to finalise their internal approval process only after they are updated of the unitholders’ approval of the supplementary agreement (thereafter, purchasers will require approximately 1 month for the fulfilment of the various conditions precedent to the drawdown of the acquisition loan).
Both the purchasers and Sponsor are actively working with the financiers on the acquisition financing with a view to potentially securing the credit approvals by the end of September 2023.
ii. Flexibility of a Two-Stage Completion
Completion of Stage Two is subject to the completion of Stage One, and both dates cannot be later than the long-stop date.
iii. Revised Property Values
The revised agreed property values, which have increased from their agreed property values under the Equity Purchase Agreement dated 30 September 2022.
For Chongxian Port Logistics, the revised agreed value is RMB824.4m, up from RMB820.1m set out in the 2022 circular. For Stage 1 of Bei Gang Logistics, the revised agreed value is RMB1,217.4m, up from RMB1,212.6m set out in the 2022 circular.
The above values represent a blended premium of 18.4% compared to the purchase considerations of the divestment properties at the IPO of the REIT.
iv. Revised Relevant Mandatory Payment Amount
For the avoidance of doubt, the Equity Consideration remains fixed at RMB1,370,000,000.
Rationale for the Supplementary Agreement
i. It enables EC World Group to meet its repayment obligations under its financing agreements;
ii. It provides unitholders an opportunity to realise the value of the divestment properties and preserve the long-term value of EC World REIT for unitholders.
Rationale for the Manager’s Support for the Long-Stop Date Extension
i. It will allow the purchasers the opportunity to complete the divestment and make full payment to EC World Group of the Equity Consideration pursuant to the divestment, allowing EC World Group to fulfil its repayment obligations. By providing more time for the completion of the proposed divestment increases the likelihood that EC World Group would be able to avoid a potential default on its financing obligations.
ii. Sponsor has continued to demonstrate support to EC World REIT by working closely together with the Manager to engage the lenders in relation to the REIT’s refinancing exercise which has been completed on 6 June 2023.
iii. EC World REIT will continue to receive income from the 2 properties in the meantime.
iv. Proposed divestment provides unitholders the opportunity to realise the value of the divestment properties and preserve the long-term value of EC World REIT for unitholders.
Rationale for the Manager’s Support to Proceed with the Two-Stage Completion
i. Doing so will allow the purchasers to provide the 1st tranche of divestment proceeds to EC World Group earlier (as part of the Completion Stage One), thereby increasing the likelihood that EC World Group will be able to partially repay its loans earlier.
ii. Manager understands from the purchasers that such an arrangement could potentially help to facilitate them in securing their financing for the proposed divestment.
Pro Forma Financial Effects of the Proposed Divestment
- Net Asset Value (NAV) will fall from 75.2 cents before the proposed divestment to 74.0 cents after the divestment, and to 61.9 cents after the special distribution payout.
- In terms of distribution per unit, it will fall from 5.12 cents (before the divestment) to 3.63 cents (after the divestment is completed).
Advice of the Independent Financial Adviser (IFA)
The Manager has appointed Provenance Capital Pte Ltd as the IFA, and accordingly, it has advised the Audit and Risk Committee and the Independent Directors to recommend that the independent Unitholders vote in favour of the resolution to approve the Supplementary Agreement.
Other Pointers to Take Note
- If the proposed divestment does not occur by 31 October 2023, there would be an increase in margin payable under the Facilities.
- If the proposed divestment does not occur by 30 April 2024 (a date that is agreed by all the lenders under the Facilities), it is an event for default under the Facilities.
- Proposed divestment is expected to generate net proceeds of RMB1,320,000,000 (approximately S$2,55,288,000) after the deduction of relevant transaction costs (which is estimated to be around S$11.7m), before taking into account savings on potential transaction-related tax expenses which would be borne by the purchases, which are expected to provide sufficient cash proceeds to enable EC World REIT to finance the relevant mandatory prepayment amount, and at the same time, enable the REIT to to return cash to unitholders in the form of Special Distribution (estimated to be around 12.11 cents/unit).
- EC World REIT’s working capital is adequate over the next 12 months and there should not be an issue with its ability to continue operating as a going concern at this juncture.
Personally, everything set out in the circular is reasonable, and as a unitholder, I will vote in favour of the ordinary resolution in the coming EGM – which I will be attending in-person.
The biggest concern I have at this juncture is, considering the current economic weakness in China at the moment, whether the purchasers will be able to secure the financing before the long-stop date and complete the divestment, close this case (on the mandatory prepayment of its borrowings), and then move on from there.
As a unitholder, I hope that this entire saga can be closed by 31 October 2023. I will keep a very close watch on how everything develops (I have always been all these while), and continue to engage the management as and when necessary (I will also share any material updates on this blog from time to time).
With that, I have come to the end of this post where I attempted to summarise the main pointers to take note on EC World REIT’s circular about the coming EGM. Do note that everything you have just read above is purely for educational purposes only, and they do not represent any buy or sell calls for the REIT’s units. You are strongly encouraged to do your own due diligence before you make any investment decisions.
- Notice of EGM
- EGM Booklet
- Circular Dated 16 August 2023
- Electronic Despatch of Circular & Arrangements Relating to the EGM
Disclaimer: At the time of writing, I am a unitholder of EC World REIT.
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