CDL working on PPS for Nouvel 18: sources

Faced with a looming November deadline to finish selling all its units in the completed Nouvel 18 condo project in a plush District 10 locale, City Developments Ltd (CDL) is racing to stitch together a profit participation securities (PPS) scheme for the project, BT understands.

The deal, if it materialises, will see CDL's role in Summervale Properties, the company that developed the 156-unit freehold condo, change from that of equity owner to bond holder with a share of the potential upside; however, CDL will also bear the biggest risk among four groups of participants in the proposed structure.

Sources say the securitisation structure which CDL is proposing to potential investors and lenders will price Nouvel 18, which is located near the corner of Anderson Road and Ardmore Park, at around S$965 million; this translates into S$2,750 per square foot based on its saleable area of some 351,000 sq ft.

News of a potential PPS comes just a few weeks after CDL announced it had gained full ownership of Summervale Properties, after buying out partner Wing Tai's half-stake.

Now, word in the market is that CDL is trying to wrap a potential securitisation deal involving Nouvel 18 and to clinch all necessary approvals before November 2016.

The project received Temporary Occupation Permit (TOP) in November 2014 and Summervale has to finish selling all units in the project within two years of the TOP date, as part of government conditions on foreign housing developers (which by definition includes all listed companies).

Otherwise, CDL will have to pay hefty extension charges to the state for each year of extension, pro-rated to the number of unsold units in the project. The group has yet to begin selling the project.

Word on the street is that CDL is trying to interest some banks to tap their private banking clients who may be keen to participate as equity investors to effectively take full ownership of Summervale Properties.

The plan is to raise S$118.4 million equity or about 12 per cent of the transaction price from these investors, who have to be Singapore citizens or Singapore-incorporated private companies that are fully owned by Singaporeans.

They will receive a 3.5 per cent per annum fixed payment over a five-year period, which the equity investors may take upfront; doing this will effectively discount the equity raised to around S$97 million.

However, the bulk of risk in the structure will be undertaken by CDL, through its subscription of junior mezzanine bonds (which are expected to account for around 14 per cent of the S$965 million transaction price.

There will also be a senior mezzanine bond tranche (also 14 per cent of the deal size and on which CDL will give a corporate guarantee). CDL could initially hold these bonds - which will have a 3.5 per cent per annum coupon for a five-year period - but is prepared to place them out to investors. BT understands that priority allocation of the senior mezzanine bonds may go to the equity investors.

CDL is also believed to be working with some local banks to obtain senior debt, to fund 60 per cent of the transaction. The listed property group is targeting to seal the deal within the next month or month-and-a-half.

When contacted, CDL's spokewsoman said: "CDL is constantly reviewing ways to optimise and unlock the value of our asset portfolio. With regards to Nouvel 18, we had stated earlier that we are exploring various options, which include sales of individual units, bulk sales or a capital markets transaction. No definitive agreements have been entered into at this preliminary stage."

The proposed transaction being discussed in industry circles will see Summervale's effective equity ownership change from being 100 per cent owned by CDL (and hence subject to the government's Qualifying Certificate or QC conditions for developers of private residential land that are not fully owned by Singapore citizens) to a private structure, with full ownership by Singaporeans (the proposed equity investors).

This would set the stage for Summervale to seek a clearance certificate from the authorities, followed by a further application to cancel the QC.

The QC rules are aimed at preventing hoarding and speculation of private-sector residential land (this excludes sites sold by the state) by foreign developers - defined as any company that has even a single non-Singapore citizen director or shareholder. This effectively covers all listed companies including CDL.

Once the proposed structure is fully in place and all the approvals given, the plan is to begin selling Nouvel 18 units in the market; the indicative target price is understood to be above S$3,000 psf.

Assuming the price achieved is higher than the S$2,750 psf entry level, the equity investors and the junior mezzanine bond holders (that is, CDL) will split the gains equally.

In the event that the units have to be sold below S$2,750 psf, the junior mezzanine bond holders (CDL) will take the first hit of up to nearly S$300 psf loss, translating into a selling price of at least S$2,451 psf.

If the selling price were to sink below S$2,450 psf, the equity investors will start to suffer a loss, according to market talk.

The junior mezzanine bonds will have a longer tenor of seven years, compared to five years for the other three groups of participants in the exercise - the equity investors, the banks that will provide the 60 per cent senior debt, and the senior mezzanine bond holders.

The longer tenor for the junior mezzanine bonds is seen as potentially catering for a situation where the units in the Nouvel 18 project could not be sold out within five years and refinancing is required from the banks.

Analysts are not surprised that CDL is trying to structure such a deal before the sales deadline for Nouvel 18 ends in November.

Otherwise, CDL will have to pay extension charges, amounting to around S$38 million (or 8 per cent of the purchase price of the site) in the first year of extension.

The extension charges will escalate to S$76 million (or 16 per cent of the land purchase price) in the second year and 24 per cent of the land purchase price per annum in the third and subsequent years.

However, extension charges are pro-rated to the number of unsold units in the development.

This article was first published on July 29, 2016.
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