Untying the Knots: Simplifying Corporate Actions

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, IHS Markit's Managed Corporate Actions™ team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

China Property Developers Continuing to Tread on Thin Ice

The introduction of China's Three Red Lines has sent a tremor within the country's real estate industry. As China continues to clamp down on debt levels and tighten its policies within the Mainland, an enormous amount of strain has been placed on Chinese property firms' short-term liquidity and expansion goals.

Before we go any further, let's dive into this "Three Red Lines" policy:

In August 2020, China imposed the Three Red Lines policy on several selected developers when they discovered growing debt levels and rising land prices. As the country became home to some of the topmost-indebted property developers, the People's Bank of China and the Ministry of Housing took measures into their own hands. They enabled "three red line" thresholds that must be passed in case developers wanted to refinance projects:

1. A liability-to-asset ratio of less than 70%;
2. A net gearing ratio of less than 100%;
3. A cash-to-short-term debt ratio of at least 1.

According to the policy, developers' debt growth will be capped according to how many thresholds they breach. If a firm can pass all three, it can increase its debt by a maximum of 15% within the following year.

So developers' overbuilt—what's the big deal?

Well, before you ask that—you need to understand just how much they have overbuilt by. Experts have found that over 90% of Chinese families already own a house/apartment. The ratio has hit that almost one apartment is currently empty for every four apartments built. To date, it is said that there are over 65 million empty houses/units resulting from the over-build… "enough to house the population of France." It remains unclear how and when this supply/demand ratio went so-sideways [1].

How's this playing out in the world of Corporate Actions?

Considering developers have until mid-2023 to meet the country's expectations, Chinese real estate firms have been looking at different mechanisms to postpone their payments and avoid defaulting on their dollar-denominated debt and restructuring.

One corporate action in particular has seen a more recent spike in the region, which one could only assume is a direct translation to China's Three Red Lines... that being, Exchange Offers.

As we review our historical data on Chinese Exchange Offers versus what we are seeing today, it is apparent that this 252% spike must be stemming from somewhere. In 2018-2019, we found a total of 27 Exchange Offers offering new notes, while in 2020-2021, numbers rose to around 96.

Below are only a few more recent examples of some of the Exchange Offers trend found within the past month:

• Xinyuan Real Estate Co. averted a default for notes due October 15 where an exchange for new bonds and cash was agreed to by bondholders [2].
  
  
• China's Modern Land defaulted on notes that matured on October 25 resulting in a ratings downgrade by Fitch and Moody's [3].
  
  
• Yango Group Co. Ltd received bondholder approval to issue a debt swap of new notes for bonds due November 19 and have the repayment extended to September 2022 [4].
  
  
• Kaisa Group offered 400 million of debt maturing in December 7 for new 18 month notes to avoid debt restructuring [5].

For now, it seems that the debt crisis looming over the real estate sector will continue into 2022. Our customers can expect more Exchange Offers to be announced in the subsequent months as developers seek investor consent to extend the maturity dates of their debt obligations.

The light at the end of the tunnel remains dim for now, but as with many crisis' that have occurred in the global economy, the country continues to speak the Chinese idom "船到桥头自然直" (all will be good).

The Move to T+1

After the 2008 financial crisis, the global industry began to focus on reducing risk, achieving greater transparency, and improving efficiency to establish a safer market environment. One significant result from this initiative was shortening global markets' settlement cycles from a T+3 to a T+2 period.

In the name of reducing counterparty risk and increasing global settlement harmonization, Hong Kong and South Korea led the way back in 2011 as they finalized their T+2 introduction. This then kicked Europe into gear as they mandated a T+2 settlement cycle in 2012, and finally, by 2017, almost all markets globally, including the US, had followed suit [6].

APAC is doing it again!

In November 2021, the Securities and Exchange Board of India (SEBI) announced that the Market Infrastructure Institutions of India (MIIs), inclusive of Stock Exchanges, Clearing Corporations, and Depositories, have finalized their roadmap for the implementation of the T+1 settlement cycle on equity securities. Similar to what we saw back in 2011—it is evident that the APAC region is leading the way. However this time, one major differentiating factor is taking the industry for a loop. India plans on implementing this approach through a phased-in mechanism.

So, what does that mean?

The Exchanges of India have indicated that rather than transferring all securities in one giant swoop, they will compile an initial list of 100 securities set to make the first move, followed by 500 securities each month until eventually all securities trading on either NSE, BSE, and MSE are following the T+1 settlement cycle period.

Although many different parameters are being used in creating the list and order of these securities, one of the main components for the rankings will be based on the daily market capitalization averaged for October 2021. The bottom 100 stocks will first transfer to T+1 starting February 25, 2022. Following the first phase, the next 500 bottom stocks from the list will be introduced on the last Friday of every month until all the stocks are transferred over. Finally, the exchanges went so far as to address that any new stock listed after October 2021 shall be ranked based on the market capitalization of the average trading price 30 days after commencement of trading [7].

Now, all we await is "Ready, Set… ACTION!"

The End of the Conglomerate Era?

In November 2021, the marketplace was hit with three strikingly similar announcements from some of the largest global companies worldwide:

1. General Electric (NYSE: GE) to split into 3 companies [8];
2. Johnson & Johnson (NYSE: JNJ) to split into 2 companies [9];
3. Toshiba (TYO: 6502) to split into 3 companies [10].

What primarily makes these announcements so interesting is all three companies were once considered the leaders in their field (or should we say fields) of business. It is for this reason each firm has been dubbed with the "conglomerate" business framework.

However, it seems that each company is ready to try out a new and more 'focused' business model. If you can recall, these decisions look similar to the approach we saw Morton Salt take with selling its airbag division, eBay, and its separation from its payment processing company PayPal, Siemens, and its energy business spin-off, IBM, and its IT services split last year in 2020... need we name more?

These spin-offs allow these new independently traded companies to function as free-standing entities, which enables them to allocate capital more efficiently into opportunities that may present themselves… especially mergers and acquisitions geared towards their specific line of business. The once-popular business terms "diversification" or even "bigger is better" are now being replaced by "more focused" and "area of control" [11].

Let's break down the details for each expected split:

1. US industrial giant, GE, will split into three separate units focused on: Aviation (expected to be GE's new primary line of business and serves as their current 'cash cow'), Healthcare, and Renewable Energy and Power. Both splits are set to occur as tax-free spin-off transactions; the healthcare branch in 2023 and Energy in 2024. One cannot beg to question-- Is this another attempt at a Reverse Morris Trust, which GE strived for back in 2019 with their transportation business? More details to come.
2. Healthcare giant, JNJ, will split their consumer-based products (mostly known for Tylenol, Band-aid, Neutrogena) into a separate company and keep their main branch focused on pharmaceuticals and medical devices. Looking at the numbers to say, some might say that is the most logistical outcome considering their single-shot coronavirus vaccine recorded them a 13.2% increase in sales, as opposed to their 4.1% increase in revenue brought by their consumer products units in the same timeframe [12].
   Expected for mid-2023, JNJ's split and business line decision has been considered the riskier of the three company announcements as it almost seems a bit "spur of the 2021 moment" [13].
3. Japanese industrial giant, Toshiba, sets to separate into three separate companies:
   1. Infrastructure Service Co.1, consisting of Toshiba's Energy Systems & Solutions, Infrastructure Systems & Solutions, Building Solutions, Digital Solutions and Battery businesses;
   2. Device Co.2, comprising Toshiba's Electronic Devices & Storage Solutions business;
   3. Toshiba, holding its shares in Kioxia Holdings Corporation (KHC) and Toshiba Tec Corporation… primarily focusing on computer memory manufacturing [14].
      
      

Due to its unprecedented transactions seen in Japan, this more-radical decision is set to occur in the second half of 2023 and is estimated to cost around USD 87 million.

So is it the end of the conglomerate era?

One must make their own decision here. It may seem so with all the news we have heard of in the past months/years. But it is critical to remember the conglomerates that still stand today: Berkshire Hathaway, Pepsico, Mars, Inc. Even consider Meta Platforms, Inc. (formerly known as Facebook, Inc.) Or what about the Walt Disney and 21ST Century Fox Merger in 2019, creating the leading international media conglomerate? There might be more to understanding the conglomerate era's position by investigating the types of breakdowns and makeups than solely looking at the economic timeframe in which we stand. More to come…

Ever heard of a Voluntary Liquidation?

When you hear the term "Voluntary Liquidation", one could surmise that a company will undergo a liquidation in which shareholders could have the ability to elect what they would receive as part of their liquidating entitlement. However, as we look at a more recent business case out of Mauritius, we find that this is not necessarily the case.

So what does a Voluntary Liquidation mean?

A voluntary liquidation is a self-imposed wind-up and dissolution of a company that begins with its board of directors or ownership deciding to liquidate. The board's resolution is presented to shareholders for approval by at least a 75% voting threshold for liquidation proceedings to move forward. As you can see, the word "voluntary" in this context is not associated with a shareholder's ability to elect their liquidation entitlement, but rather their ability to voluntarily vote for or against the decision to liquidate the company.

On the contrary, a compulsory or mandatory liquidation is a formal insolvency procedure that involves lodging a petition by involved parties, such as the company itself, creditors, contributors, etc., for the winding up of its assets by a court order. Upon hearing the application, the court may dismiss the petition or make the order for winding-up. Upon the decision, the court may appoint one or more liquidators who will be charged with ascertaining and settling the liabilities of a company before putting it into dissolution, which is the last stage of the liquidation process.

Again, as we see through by each defined process, there is no correlation in the mandatory/voluntary naming convention to whether shareholders will receive a single liquidation payment or have the ability to elect from more than one entitlement.

Reality Check:

Arden Capital Ltd. is a Mauritian diversified investment holding company listed on the Johannesburg Stock Exchange, focusing exclusively on Zimbabwe. The company has struggled from the beginning to achieve liquidity for its shareholders and has failed to attract any additional capital to grow its portfolio. The company's portfolio now consists of only two remaining investments, which are held by its wholly-owned subsidiary, Arden Enterprises Limited (AEL), which include a 62.76% stake in African Sun, a real estate and hospitality group, and a 100% stake in FML Logistics (Private) Limited, which offers bulk petroleum product road transport [15].

On November 18, 2021, the Board of Arden Capital proposed, after a strategic review, that shareholders consider and approve a Voluntary Liquidation of the Company at the Special Meeting of Shareholders to be held on December 20. They will also be voting on related transactions involving

1. the pro-rata unbundling by Arden Capital of its entire holding in Arden Enterprises Limited (AEL) to shareholders through a distribution in-specie, which is a Spin-Off event and will take place before its liquidation and;
2. a Reduction of Stated Capital. Arden Capital plans to sell its 100% stake in FML Logistics, the proceeds from which will cover its liquidation costs, settlement of Group debt, and other creditors [ 16].

Holders will receive 1 share of AEL for every 1 share held as part of the pro-rata unbundling (Spin-Off) transaction. There has been no reference yet to what the actual liquidation entitlement will be part of Voluntary Liquidation.

Our Managed Corporate Actions Experts will continue to monitor future announcements made to all the above postings to ensure the most accurate and reliable corporate actions data coverage. Please reach out for more information or questions.

Interested in more? Please find:

Managed Corporate Action's October Postings

Managed Corporate Action's September Postings

Managed Corporate Action's August Postings

Managed Corporate Action's July Postings

Managed Corporate Action's June Postings

Posted 30 November 2021 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.