Paliburg completes first MBS

Paliburg raises much-needed finance with the completion of its first securitization deal.

Paliburg Holdings of Hong Kong has completed its first commercial mortgage backed securitization deal through the issue of HK$1.4 billion ($181 million) in securities. The deal was structured and lead arranged by SG with Ka Wah Capital as co-lead manager.

The deal will come as a great relief to Paliburg, its shareholders and creditors. The property and hotel company has been suffering from the downturn in Hong Kong's property market since 1998. In its most recent results issued on September 22, the company announced a loss of HK$279 million for the six months ending June 30. This compares to a loss of HK$114 million for the same period in 1999.

At the end of 1999, Paliburg had negative working capital, as current liabilities were HK$2.48 billion while total current assets were only HK$2.20 billion. As of December 1999, the company's long term debt was HK$8.26 billion and total liabilities (all monies owed) were HK$11.44 billion. The long term debt to equity ratio of the company was 1.13.

This situation had forced the company into an aggressive asset disposal regime and debt restructuring programme. In mid-2000 the company sold its Regal Hotels subsidiary to Millennium & Copthorne Hotels of the UK.

This latest transaction securitizes the commercial mortgage payments that Paliburg and its subsidiaries will make on two of its premium Hong Kong properties. The issuing vehicle is Commercial Plaza Securitization and the properties that are being securitized are the Kowloon City Plaza - a shopping mall and cinema complex - and Paliburg Plaza, a retail and office block which serves as the group's headquarters.

Financial architecture

The CMBS is split into seven tranches - six of which are rated from Aaa to Ba3 by rating agency Moody's. There is also one unrated zero coupon mezzanine tranche.

The notes are mainly floating rate notes priced at spreads over Hibor ranging from 80bp going up to 260bp over Hibor. There is one fixed rate tranche which pays 8.2% interest each year. All the notes are due for repayment in September 2006. A mix of Hong Kong investors participated in the deal from banks and financial institutions to private individuals.

Speaking of the transaction Lo Yuk Sui, chairman and managing director of Paliburg said: "This securitization represents Paliburg's maiden securitization issue and a major step forward in Paliburg's debt restructuring."

One risk that the deal had to overcome was that Paliburg itself is the main tenant in Paliburg Plaza and as such if it was to miss its rent payments then the subsidiary mortgagors would not make the necessary payments to the special purpose vehicle, which in turn would not be able to pay the bond holders. Resolving this issue with the issuer and the rating agencies was what took the bulk of the six months that this deal took to arrange.

Nevertheless, the deal shows the value that can be gained out of securitization in special restructuring circumstances such as this. "Compared to a corporate loan or bond secured against the properties, we have achieved a more cost effective and diversified way of raising funds through the issuance of rated securities," says Michael Leemputte, head of financial engineering Asia Pacific at SG in Hong Kong. "The fast pay structure of the transaction uses excess cashflow to pay down the notes directly. This can lead to lower leverage for the transaction at loan maturity, which would decrease financing risk and thus result in a relatively larger financing amount up front."

However, with Hong Kong's banks and loan markets flush with liquidity at the moment, analysts are not expecting this kind of heavily structured transaction to be often repeated. Only in special situations such as that of Paliburg is it worth putting the time and effort into structuring such a deal, they say. Indeed, in the case of Paliburg, it was perhaps the only way it could raise finance.

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