Private equity real estate investment firm InfraRed NF and a subsidiary of Singapore-listed Metro Holdings closed a $92.2 million mezzanine financing deal with Hong Kong-listed developer Fullsun International, a subsidiary of Changsha-based developer Fullsun Group.
The structured-debt deal by the Hong Kong-Singapore consortium is aimed at funding Fullsun International’s construction and acquisition of projects from smaller developers, after the Hong Kong-listed firm acquired four projects in the last year, according to an announcement today from InfraRed NF.
Fullsun International, which lost $677 million in the year leading to March 31 2018 is backing up its bet by providing rights to partially completed residential projects in Hunan’s capital of Changsha, and a mature office asset in Hong Kong, as collateral for the loan.
Fueling an Acquisition Strategy
The loan provides more fuel for an established strategy of expansion via M&A for Fullsun, which acquired or took partial control of four companies last year.
In February 2018 it acquired a 40 percent stake in Hunan Xing Ru Cheng Property Development for RMB 100 million, and then in March it secured an additional 11 percent of that company in Changsha for RMB 50 million.
In May, it added a 34 percent stake in Ningde Bisheng Property Development for RMB 156.9 million; in July, it acquired Fuzhou Kangan Lixin Investment for close to RMB 1 billion, and in September it purchased 75 percent of Jiaxing City Bojin, in Zhejiang province near Shanghai for RMB 430 million. The Fuzhou Kangan acquisition gave Fullsun control of an 18,200 square metre site on Hunan’s Meixi Lake that can be developed into approximately 129,000 square metres of homes.
“Fullsun International has a strong acquisition pipeline of distressed opportunities and we look forward to continue working with them across Tier One and select Tier Two cities,” said Grant Chien, Head of Special Situations Financing at InfraRed NF Investment Advisers.
According to the company’s annual report, Fullsun International expects to launch four projects between 2019 and 2020, all of which will be located in Changsha. It is not clear if these four projects are related to Fullsun’s acquisition of Hunan Xing Ru last year.
A Financial Lifeline
Fullsun International could also make use of the fund’s to relieve financial pressure after the company’s revenues and stock price have slid in recent months.
The firm lost RMB 4.6 billion ($667) year on year in March of 2018, when its yearly revenue fell eight percent to RMB 553 million. The Hong Kong-listed stock is down 45 percent year-on-year and has slid 63 percent from its March 2018 peak, despite the company’s interim report, which was issued in December, showing that its after tax profit grew to RMB 171 million in the six month period, up from RMB 49.5 million in the corresponding period the previous year.
The financing deal for Fullsun Internationa was structured with the benefit of recourse to Fullsun International’s parent company Changsha-based Fullsun Group, which brought in $9 billion in revenue last year, according to the press release.
To guarantee the loan, Fullsun is providing as collateral two of its partially completed residential projects in Changsha, with what InfraRed NF terms “additional credit enhancement from one of its mature office assets in Hong Kong.
The gross portfolio value of the Changsha projects is north of $380 million, according to an InfraRed NF statement, and the only Hong Kong property listed in Fullsun International’s annual report is Enterprise Square 3, in Kowloon, where the developer acquired five office floors for HK$1.3 billion ($169 million) in March last year.
InfraRed NF Expands Bets on Asia’s Regional Hubs
InfraRed NF is a Hong Kong joint venture between London’s InfraRed Capital Partners, which has $10 billion under management, and Vervian, a unit of Hong Kong-headquartered developer Nan Fung Group.
The investment into Fullsun’s projects is part of InfraRed NF’s strategy “to focus its lending activity on projects in regional hubs, benefiting from infrastructure investment, with strong economic fundamentals and sizeable population bases,” according to the company.
In the past, InfraRed NF has completed 10 mezzanine investments amounting to over $650 million, with seven of those deals having already been repaid. In a similar investment concluded in July of last year, InfraRed NF, along with two partners, invested $88 million into a $900 million project in Yangzhou in Jiangsu province by local developer Keyne Properties.
Taking Advantage of China’s Credit Crunch
This latest transaction, which was finalized in less than two months, according to InfraRed NF, comes as China’s credit crunch has left developers scrambling for alternate funding sources.
“A window of opportunity has arisen for InfraRed NF from the well-publicized contraction of available credit within China. China’s deleveraging is creating an attractive investment environment for us resulting in a healthy pipeline of mezzanine and value-add deals,” said Stuart Jackson, CEO of InfraRed NF Investment Advisers.
A lack of alternative options has made developers more amenable to mezzanine deals like those provided by InfraRed NF, which typically add an equity component to debt financing and usually carry higher interest rates than traditional bank loans.
Mezzanine demand in China started to build up since September of 2017 as liquidity tightened, Jackson told Reuters last year. This tightening allowed InfraRed to lend to mid-size developers which would otherwise be able to access cheaper bank loans, but who are now unable to compete against larger companies for credit, he added in that same interview.
Joint ventures are an increasingly common vehicle for these mezzanine investments, since they are not recorded on balance sheets, giving companies the option of leaving the leverage from these transactions off their main financial information sheets, according to Simon Wong, associate managing director of corporate finance at Moody’s, quoted by research provider Private Debt Investor.