August 6 - Nanjing Cenbest (600682.SH) announced that House of Fraser (HOF), the British department store it acquired last year, recently secured £400 million worth of credit refinancing, which will mainly be earmarked to replace the chain's earlier £250 million of high-yield bond.

 

This is the first corporate bond issued successfully by European department stores after the Greek debt crisis. The bond issuance will significantly reduce the company's financial costs and improve its profitability.

 

As revealed on the Announcement, the refinancing, whose joint main underwriters are ICBC London Branch and HSBC Headquarters, comprises corporate bonds and bank loans, with floating interest rate. Its average interest rate stands at under 4.9 per cent, which is significantly lower than the 8.9% interest rate of its high-yield bond before the replacement. The replacement of the bond is expected to reduce the annual interest expense by more than £10 million, which will bring substantial net profit growth for HOF.

 

In fact, the replacement of HOF's high-yield bond has been engineered by Nanjing Cenbest upon its acquisition of HOF. Over a year later, the plans and commitments have been fulfilled on schedule.

 

Commitments for low-interest refinancing are fulfilled

In April 2014, Nanjing Cenbest achieved absolute control of HOF by acquiring 89% share in the UK's time-honoured department store, at the basic consideration of £155 million. This is the largest overseas investment in a retail business by a Chinese enterprise to date. With 166 years of history, HOF is the warranted supplier of British royal articles, with 62 stores operating in Britain, Ireland and the Middle East. Nanjing Cenbest expects to give play to the high profitability of HOF's mature, own-bought and house brands models, with the goal of transitioning Nanjing Cenbest strategically from the traditional department store to a modern one.

 

However, before being acquired by Nanjing Cenbest, HOF had been plagued with financial distress due to the high-yield bond. Nanjing Cenbest's previous announcement reveals that in 2011 HOF issued a seven-year corporate bond worth £250 million, with an annual interest rate of about 8.9%. As a result, HOF had to pay an annual interest of over £22 million, which significantly reduced the company's net profit.

 

From another perspective, this means investment opportunities: so long as the high-yield bond could be replaced with the low-yield one, the financial burden on the company would be significantly lessened, with the reduced part directly converted into company profits.

 

Thus, Nanjing Cenbest promised then it would help HOF convert its high-yield bond into low-cost debt via refinancing. One year later, the strategic planning upon the acquisition has been successfully fulfilled through the £400 million of low-interest refinancing.

 

It is noteworthy that the financing relies on credit guarantee rather than pledge of assets, which is rather rare against the backdrop of the current European debt crisis and monetary tightening. In fact, with the outbreak of the Greek debt crisis and the aggravation of European debt crisis, the entire European banking system has resorted to credit rationing, making it fairly difficult to replace the high-yield corporate bond with low-interest refinancing. Related personnel told reporters that HOF's refinancing is the first successfully issued corporate bond for a European department store business after the Greek crisis.

 

People close to the transaction disclosed that it took Nanjing Cenbest only more than a month to negotiate with the financial institutions in London and to settle this £400 million of refinancing cooperation project with ICBC London and HSBC. This indicates that the European financial community is quite optimistic about Nanjing Cenbest. The aforementioned personnel noted that this project relies solely on credit guarantee, which can rid HOF of financial distress on the one hand, and on the other, free Nanjing Cenbest from assets pressure. It also manifests the European financial community's unique vision on project value judgement and risk identification as well as its mature and efficient operation system. In sharp contrast, it would be extremely challenging to refinance in China even with the pledge of assets, which is the current predicament confronting many similar quality, domestic enterprises.

 

Overseas acquisition is seeing a bright prospect

During his visit to China in March 2015, Prince William met privately with Yuan Yafei, the de facto controller of Nanjing Cenbest, in the GREAT Festival of Creativity in Shanghai. Later they together visited the Elephant Sanctuary in Yunnan, where they reached the consensus on co-establishing the Wildlife Conservation Fund. All these initiatives have greatly deepened the British society, business and financial community's awareness and understanding of Nanjing Cenbest and Sanpower Group, its parent company.

 

The UK-based ICBC London and HSBC have been showering their attention on the business states of HOF after the acquisition. The like-for-like sales of HOF were up by 8 per cent in the fourth quarter of 2014, breaking the best record in its 166-year history, and the Valentine's Day of 2015 has seen even higher sales. The store will hopefully record substantial growth throughout the whole year. Meanwhile, HOF's online businesses are also faring well with the help of Nanjing Cenbest, with new sales growth point coming to the fore. What is most anticipated is that HOF's plan to enter China has been carried out in full swing, marking a bright market prospect for this quintessential store. Therefore, it is visionary of ICBC London and HSBC to provide this refinancing, which also ensures their own commercial interests.

 

Latest statistics suggest that the UK economy is shaking off the unexpected slowdown in early 2015. Between April and June, it gained 0.7% growth, thus returning to the growth rate at the end of last year. The improvement of the overall economy has boosted market confidence and financial institutions have become more willing to give liquidity to the market.

 

As for the domestic A-share listed company Nanjing Cenbest, it embraces retail and senior care as its "double main business strategy". By leveraging HOF's own-bought and house brand models as well as Natali's leading international experience in homecare, Nanjing Cenbest is emerging as the "leader of revolution in China's traditional retail industry". Analysts are convinced that the refinancing will not only relieve HOF of its financial pressures from the high-yield bond, but also pump funds in it for its future expansion in China's market. 2015 is the first full fiscal year when the business performance of HOF will be included in that of Nanjing Cenbest. Hopefully, the burden-free store will add to the lustre of its parent company Nanjing Cenbest.