December 12, 2017 / 10:52 AM / a month ago

China-backed buyer aims to fund $5.2 billion HK skyscraper deal mostly via debt-sources

HONG KONG (Reuters) - The China-backed buyer of a Hong Kong skyscraper from billionaire Li Ka-shing for a record $5.2 billion is seeking to borrow as much as 90 percent to fund the deal, according to a term sheet seen by Reuters and people with knowledge of the matter.

The unusually high leverage level reflects a growing appetite from new mainland China buyers who are willing to pay a high price to get into the Hong Kong property market, at a time when many traditional local players are selling and investing overseas.

Hong Kong business tycoon Li’s CK Asset Holdings (1113.HK) said last month it was selling “The Center”, a 73-storey office tower, to C.H.M.T. Peaceful Development Asia Property, in the world’s biggest single property sale which would bring in a HK$14.5 billion ($1.86 billion) gain.

Beijing-based China Energy Reserve and Chemicals Group Properties Ltd owns 55 percent of C.H.M.T. Peaceful Development, while the remainder is held by a few Hong Kong investors.

The buyer of “The Center” is looking to raise around 40 percent of the $5.2 billion in one-year mezzanine financing by offering to pay 8 percent interest, the term sheet showed. The remainder of up to 50 percent will be raised in the form of a senior loan, said four people, three of whom were bankers involved in the deal.

“It’s a sign that there’s a lot of new entrants in the Hong Kong market from the mainland, and the buyers are names people aren’t so familiar with,” said Stuart Jackson, chief executive officer of InfraRed NF Advisers Limited, an Asian real estate investment manager.

“(At the same time) it seems to be a trend that Hong Kong players are selling and investing overseas...the level of substitute capital from the mainland has been more than sufficient to compensate, so for now prices continue to go up.”

C.H.M.T. Peaceful Development could not be immediately reached for comment.

MEZZANINE LOANS

Most property buyers in Hong Kong borrow about 40-50 percent of the deal value to finance their acquisitions, according to industry experts, and the use of mezzanine loans is not common.

Mezzanine loans command much higher interest rates than other types of loans because they require minimal collateral. Property related mezzanine loans carry interest of between 6 percent and 10 percent in Hong Kong.

    Because banks in Hong Kong are restricted from lending more than 50 percent of the transaction value, the mezzanine financing will likely be provided by fund houses. The consortium has until March to finalize the mezzanine financing, according to the C.H.M.T term sheet.

    C.H.M.T. has already paid a 10 percent deposit. Due to the high coupon and the low investment yield in Hong Kong, mezzanine loans are usually used as bridge financing. Local media has reported that C.H.M.T. Peaceful Development is planning to flip the investment by selling off part of the building.

    Banking sources said any plan to sell off a part of the building, however, may make some banks hesitant about joining the senior loan portion, as it could potentially complicate repayment obligations.

    The latest deal further expands Chinese investors’ footprint in the Asian financial hub’s prime office district, where half of all new leasing space has been snapped up by mainland Chinese companies - many of them funded via debt raised in Hong Kong.

    Chinese conglomerate HNA Group said last month it had repaid part of a HK$3.5 billion ($448 million) loan, while obtaining lenders’ consent to extend the remainder’s maturity, linked to the group’s first land purchase in Hong Kong.

    ($1 = 7.8075 Hong Kong dollars)

    Reporting by Clare Jim and Yan Jiang of LPC; Editing by Sumeet Chatterjee and Muralikumar Anantharaman

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