New World Development's Perpetual Bond Dilemma: Liquidity Risks and Eroding Creditor Trust

The $345 million perpetual bond due in June 2024 marked a pivotal moment for New World Development Co. (NWD). By choosing not to redeem the bond, the company triggered a coupon rate hike to over 10%—a stark reminder of the liquidity pressures engulfing its $4.5 billion perpetual bond portfolio. This decision, while not a default, has sparked investor skepticism and raised alarms about the erosion of trust between NWD and its creditors.

The Perpetual Dilemma
Perpetual bonds, designed to provide long-term funding, have become a double-edged sword for NWD. The non-redeemable status of its May 2024 bond has forced auditors to classify these instruments as equity, theoretically easing balance sheet strain. However, this technicality masks a harsh reality: the company's net gearing ratio now exceeds 88%, among the highest in the sector. With $4.5 billion in perpetual debt outstanding, NWD faces a ticking clock as it seeks to refinance through bank loans—a process complicated by shifting creditor perceptions.

Liquidity Strains and Strategic Gambles
NWD's survival hinges on its ability to secure additional bank financing. In early 2025, the company pledged its prized Victoria Dockside asset—home to Hong Kong's luxury mall K11 Musea—to collateralize a $15.6 billion loan. While this move underscores the strategic value of its real estate holdings, it also reveals a desperation to shore up liquidity. The coupon hike to over 10% on the unredeemed bond has added further pressure, squeezing cash flows at a time when the company reported a net loss of HK$6.63 billion for the period ending December 2024.

Investors are watching closely as NWD attempts to sell assets like its Hangzhou office project (valued at 1 billion yuan) to boost cash reserves. Yet these sales alone may not be sufficient to offset the looming refinancing risks. The company's reliance on perpetual bonds—a tool typically associated with state-owned enterprises in mainland China—has become a liability. Unlike FWD Group, which faced minimal fallout after a similar non-redeemable decision, NWD lacks the same institutional backing.

The Trust Factor: Mainland Banks and Regulatory Crossroads
The crux of the issue lies in how mainland Chinese banks perceive NWD's actions. Perpetual bonds in China are almost universally redeemed at the first call date, a cultural expectation that NWD's decision has defied. UBS analysts noted that creditors could defer interest payments starting in June 啐, a feature that could push bonds further into distressed territory.

Regulatory guidance in March 2024, urging banks like ICBC and Bank of China to assess NWD's risk exposure, signals a precarious balancing act. While authorities may pressure lenders to support the firm—a flagship entity of Hong Kong's influential Cheng family—the banks themselves face reputational risks. A default could undermine confidence in the broader perpetual bond market, a lesson already learned from Road King Infrastructure's prolonged crisis.

Investment Implications: Proceed with Caution
The market has already priced in these risks. As of early 2025, NWD's bonds trade at 31–47 cents on the dollar, with the 6.15% perpetual bond fetching 69 cents—a slight rebound from late 2024 lows but still deeply discounted. Meanwhile, the stock's 11.2% rally to HK$5.36 in late January 2025 appears premature without a concrete deleveraging plan.

The question for investors is whether NWD can navigate this labyrinth of debt. A successful refinancing of its Victoria Dockside-backed loan would stabilize perceptions, but delays or defaults could trigger a liquidity spiral. With credit ratings at “A” (stable outlook) from Japanese agencies JCR and R&I—a nod to its real estate strengths—the company still retains a veneer of credibility. However, the high gearing ratio and reliance on asset sales suggest this is a high-risk bet.

Final Take: Short the Bonds, Avoid the Stock
The perpetual bond dilemma has exposed systemic vulnerabilities in NWD's capital structure. While its real estate assets offer some comfort, the erosion of creditor trust and liquidity risks outweigh potential rewards. Investors are advised to steer clear of the stock and consider shorting the perpetual bonds, which remain deeply discounted and prone to further declines if refinancing falters. The Cheng family's influence may buy time, but markets demand more than legacy—it demands cash.

In the shadow of Victoria Dockside's glittering skyline, the stakes have never been higher. For NWD, survival will depend on convincing creditors that its debt is as permanent as its name.