SHAREHOLDERS of OUE Lippo Healthcare (OUELH) appeared to welcome the news of the company' s recapitalisation exercise. The counter added S$0.002 or 5.41 per cent to close at S$0.039 on Wednesday.

 

Shares of OUE, on the other hand, dipped S$0.02 or 1.79 per cent to end at S$1.10.

 

OUELH is converting shareholder loans from OUE to convertible perpetual bonds.

 

Tata Goeyardi, managing director and co-head of equities at SooChow CSSD Capital Markets, thinks the plan is a good deal for OUELH shareholders.

 

On a pro forma basis, OUELH' s gearing would improve from 2.5 times to 0.6 time as at Dec 31, 2020. Its net tangible assets per share would more than double from 3.11 Singapore cents to 7.38 Singapore cents.

 

OUELH' s loss per share of 2.22 cents in FY2020 would also reverse - into an earnings per share of 0.45 cent.

 

The perps will have a lower fair value than the loan amount, allowing OUELH to book some S$112 million in gains.

 

Furthermore, OUELH will save some S$6.6 million each year in interest expenses.

 

Mr Goeyardi believes OUELH' s performance should bottom out from here.

 

He expects the company to report a better set of results in FY2021, now that the weight of its borrowings has been removed.

 

Signalling confidence

 

Companies within the OUE stable have mostly performed poorly over the past year.

 

With the recapitalisation, OUE appears to be signalling its confidence in OUELH - albeit at some cost to OUE shareholders.

 

The pricing for the conversion of the perps - at S$0.07 - is significantly higher than the current level of OUELH' s shares.

 

OUE had said on Tuesday that by agreeing to convert its interest-bearing loans to perps, it was showing its " commitment" to the longer-term prospects of OUELH' s healthcare business.

 

Assuming OUE converts all its perps into shares on or after Aug 31, 2026, its direct shareholding in OUELH would be about 78 per cent of the enlarged base.

 

" With a strengthened capital structure, OUELH will be better-placed to tap on the capital markets to fund future growth opportunities. At the same time, the perpetual securities will provide an opportunity for the group to increase its interests in OUELH in tandem with the growth of its healthcare business," it said.

 

Unattractive in near term

 

Unfortunately, OUELH faces some immediate headwinds.

 

It is currently developing and will operate a hospital in Prince Bay, Shenzhen. It will also lease and operate another O& G Hospital in Changshu, Jiangsu. In 2019, it expanded into Myanmar and now has three hospitals and four clinics.

 

But the Covid-19 pandemic and the current political turmoil in Myanmar have hurt OUELH' s prospects in the near term.

 

Meanwhile, OUELH' s income from its unit First Reit will dip in the year ahead. OUELH is part owner and sponsor of First Reit, which has recently had to restructure its leases at a lower rental rate.

 

On the plus side, the new rate more accurately reflects the operating performance of the hospitals within First Reit' s portfolio.

 

First Reit has also announced its intentions to diversify its portfolio outside of Indonesia.

 

It could do so by injecting stabilised assets such as OUELH' s nursing homes in Japan into the Reit, which would free up capital for OUELH to make further acquisitions or developments.

 

OUE' s various business units appear to be undergoing a general housekeeping.

 

Perhaps, with a clean slate, OUELH will be able to make a recovery.

OUE Lippo Healthcare (OUELH) on Tuesday announced a recapitalisation plan backed by its major shareholders to convert its S$189.6 million of shareholder loans from OUE to perpetual bonds.

 

These 4 per cent convertible perps can be converted into ordinary shares at seven cents each.

 

This came the same evening it announced a staggering net loss of S$97.5 million in its second half ended Dec 31, 2020, a reversal from a profit of S$3 million a year ago. Revenue was flat at S$10.1 million for the six months.

 

For the full year, it incurred a net loss of S$98.7 million, compared to its year-ago net profit of S$3.4 million, despite revenue inching up 2 per cent to S$20 million mostly due to stable rental income from its 12 nursing homes in Japan.

 

Its bottom line was affected by impairment losses for its assets and fair-value losses for its investment properties of up to S$57.9 million, versus an income of S$10.9 million a year ago, due to global economic conditions caused by Covid-19.

 

OUELH also incurred a share of loss for FY20 of about S$35 million, mainly due to First Reit' s results which were impacted by net fair-value losses of more than S$400 million as a result of its lease restructuring as well as from the four months of rental relief provided to lessees in FY20. The Reit also suffered a decrease in the fair values of its properties.

 

OUELH said that its move to convert its loans was aimed at strengthening its balance sheet, as the company has been in a net current liability position over the last few years due to the shareholder loans which are payable on demand.

 

OUELH said a stronger financial position will enable it to explore financing options to fund future growth opportunities.

 

The conversion of the shareholder loans into equity will also remove uncertainties over the firm' s going-concern assumption, as well as the encumbrances over its assets from the loans.

 

OUE can only convert the perps 5.5 years later on or after Aug 31, 2026. This will keep OUELH from being distracted by having to seek funding for redemption of the perps or diluting existing shareholder value from the conversion. After Aug 31, 2026, the perps have no fixed redemption maturity deadline.

 

The indicative fair value of the perps is S$77.3 million, which represents a discount of about 59 per cent to the fair value of the loans. This will result in a one-off indicative gain of S$112.3 million to the group' s statement of comprehensive income for FY21.

 

There will also be recurrent interest savings of about S$6.6 million per year as there will be no more interest payment on loans.

 

The conversion price is also at a premium of 125.1 per cent over OUELH' s net tangible assets per share as at Dec 31, 2020 and 79.5 per cent over its Feb 16 closing price.

 

Shares of OUE added one cent to S$1.12, while those of OUELH closed flat at S$0.037 on Tuesday.

 

The deal will also bring about an improvement in OUELH' s net tangible assets per share, gearing ratio and earnings per share.

 

Assuming a full conversion of the perps, OUE' s direct shareholding in OUELH would be about 77.9 per cent of the enlarged share issue.

 

Majority shareholder Itochu has given an irrevocable undertaking to vote in favour of the deal. It owns 25.32 per cent of OUELH, while OUE owns 64.35 per cent.

 

The company will convene an extraordinary general meeting to seek shareholders' approval. OUE and its associates will abstain from voting.

 

RHT Capital advised OUELH, together with Zico Capital as independent financial advisor.

CATALIST-LISTED OUE Lippo Healthcare expects to post a " significant loss" in its half-year and full-year results, the board warned on Friday.

 

The group, which is scheduled to release its unaudited results by Feb 23, 2021, pointed to the impact of the Covid-19 pandemic on the period ended Dec 31, 2020.

 

OUE Lippo Healthcare expects provisions and impairments on the carrying value of its investments, including First Reit, which is planning a rights issue to avoid a debt default.

 

" Given the current pandemic situation and the fact that the group operates businesses and owns assets and has investments across several countries, there have been material repercussions on the financial performance of the group," the board said.

 

The group thus forecast a net loss for H2 2020 and FY2020 based on its preliminary assessment of its unaudited consolidated financial results.

OUE Lippo Healthcare will jointly manage a obstetrics and gynaecology hospital in Changshu, China with Hong Kong-based state-owned conglomerate China Merchants Group (CMG).

 

This 50:50 joint venture in the south-east of China' s Jiangsu province will house 140 beds, with a gross floor area of about 25,000 square metres.

 

It is expected to be commissioned in 2023.

 

The project will be structured as a lease and operate model under a long-term lease of 19.5 years, with OUE Lippo Healthcare having the right of first refusal to renew the lease upon expiry.

 

Catalist-listed OUE Lippo Healthcare currently operates one hospital and is developing another two in China.

Retail traders more likely to incur losses due to lack of experience or understanding

 

BROKERAGES are seeing a surge in the use of derivatives in uncertain times - a trend that they say reflects a lift in sophistication of retail investors here. But the risks of losses on these products are also higher, and the products are sometimes not well understood.

 

Derivatives markets have historically proven useful for generating gains in economic downturns, especially as investors can take advantage of leverage to boost returns.

 

Benjamin Yeo, head of derivatives dealing at Phillip Futures, told The Business Times (BT): " Derivatives trading allows investors the flexibility to hold short positions and gain from falling prices. The unprecedented volatility earlier this year has presented investors with many opportunities to profit from short-term price movement."

 

OCBC Securities said more clients have enquired about gaining access to derivatives markets over the last few months.

 

" With each crisis, we notice that the public becomes more informed about the various instruments and options they have to manage and grow their wealth," said Keeve Tan, head of futures and foreign exchange at OCBC Securities. " The current group of investors or traders we interact with is a lot more sophisticated compared to those we saw 10 years ago." OCBC Securities registered a 168 per cent increase in trading volumes of over-the-counter (OTC) derivatives in Marchcompared to pre-pandemic times. Trading in exchange-traded derivatives increased 93 per cent.

 

At CGS-CIMB, overall retail volume for exchange-traded derivatives increased 72 per cent, while OTC derivatives was up by 13 per cent. OCBC' s Mr Tan attributed the trading surge to fear in the markets. The CBOE Volatility Index (VIX), often referred to as the fear index, reached a high of above 80 on March 16 - a level not seen since the 2008 financial crisis. Any value under 12 on the VIX is described as " little fear" , while values above 20 are typical of a " fearful market" . The VIX is derived from the implied volatility of options on the S& P 500 index, and rises as options traders price in greater volatility.

 

As the VIX rises, investors and speculators " either seek safe haven assets in a flight-to-safety play, or look to ride on the increased volatility in the markets" , said Mr Tan.

 

Investors have been unnerved by the global spread of the novel coronavirus and a sharp contraction in oil prices as countries started to close their borders, said Franky Ng, CGS-CIMB Securities' regional head of futures.

 

" Each alone would be a massive event in its own right," he said. " Having both (events happen) back to back created a crazy economic storm which almost no investor could avoid."

 

Popular products

 

Equity indices have been among the most favoured derivatives across the brokerages, as investors turn to exchange-traded derivatives to hedge their stock portfolios. Some of Phillip Futures' popular products are based on the S& P, Dow and Nasdaq indices. The E-mini S& P, for instance, saw a 71.3 per cent month-on-month jump in volumes in March.

 

At OCBC Securities, equity index contracts including the S& P and Hang Seng rose by as much as 157 per cent. CGS-CIMB said that energy contracts, mainly crude oil, were its most popular derivative products. These made up some 57 per cent of total volume from March to June.

 

Gold has also been a favourite. Trading in OTC and exchange-traded gold contracts collectively increased 123 per cent at OCBC Securities.

 

Risky products

 

Investors who want to trade derivatives on platforms regulated by the Monetary Authority of Singapore (MAS) must undergo a customer knowledge assessment. Financial institutions offering derivatives must also implement safeguards to protect inexperienced customers from large losses.

 

Such rules exist because losses from trading derivatives can stack up quickly. Some products incorporate leverage to boost returns. Daily leverage certificates (DLCs), for instance, are structured so that the value of the certificate will rise or fall several times more than its underlying asset.

 

In May, BT reported that a group of investors had lost all their initial investment after the value of their Singapore Airlines (SIA) DLCs fell to zero. The DLC SOCGEN5XSHORT SIA was designed to rise by 5 per cent for every 1 per cent fall in SIA' s share price, and was wiped out when SIA shares rose by more than 20 per cent after they began trading ex-rights. The DLC issuer Societe Generale later made a goodwill payment to the DLC holders, to account for circumstances related to the published calculation of SIA' s theoretical ex-rights price.

 

Derivatives are often traded on margin, meaning the investor only deposits a fraction of the value of a trade with the broker. An investor could buy S$10,000 worth of derivatives, but only deposit a 25 per cent margin of S$2,500. This allows investors to make huge trades - beyond the amount for which they have the cash.

 

Margin trades that go well generate large returns. But when they go badly, the leverage used means losses are multiplied.

 

Checks by BT found that brokerages have seen more margin top-ups following the virus outbreak. Margin calls are triggered when the value of the assets in an account falls below the required margin or percentage. CGS-CIMB said net top-ups were particularly high in March, jumping 60 per cent from February.

 

Phillip Futures has increased margin requirements substantially to encourage clients " to maintain more than sufficient funds" and to " safeguard" investors. In March, when crude oil prices turned negative, margins were increased by 20 per cent for crude oil-related products and selected contracts hit by oil. Said Mr Yeo: " While this (leverage) makes trading derivatives more affordable, freeing up capital to invest in other products, retail investors need to understand that their profits and losses can be amplified, and there is a risk of running into over-loss."

 

Last month, 20-year-old Alex Kearn in Nebraska, United States killed himself because he thought he had lost US$730,000 from his leveraged options trades. Reports said he had likely misunderstood the numbers in his trading app.

 

While many derivatives traders do suffer from heavy losses, such risks have not deterred Shannon Sin, a retail investor who trades options because they allow him to enter the market at a price he deems acceptable in such volatile times. " Selling puts, for example, is a great way to collect premiums while waiting for a counter to retrace," he said.

 

He believes margin calls are often the result of poor risk management and a misunderstanding of the underlying traded counter. " With the increased financial literacy and access to so much information, you can get a reasonable idea of the financial strength and reasons behind substantial movements intraday quickly," he said.

ITOCHU Corporation (headquartered in Minato-ku, Tokyo Masahiro Okafuji, President & CEO hereinafter &ldquo ITOCHU&rdquo ) announced today that it has executed a memorandum of understanding to explore and develop healthcare business opportunities in Asian countries with Lippo Group (hereinafter &ldquo Lippo" ) and its property and healthcare arm Lippo Karawaci Tbk. (hereinafter &ldquo LPKR&rdquo ).

Lippo operates LPKR, the largest listed property company in Indonesia by total assets and revenue, with a unique and integrated business model. This businesses comprise residential/township, retail malls, hospitals, hotels and asset management. Lippo also operates Indonesia&rsquo s premier hospital group, Siloam Hospitals, which operates 26 hospitals, and 16 clinics in 19 cities throughout Indonesia.

In Asia, demand for better healthcare is growing and need for significant investment in hospital and healthcare infrastructure is rising in light of the rapidly transforming society and changing population demographics as over 50% of the world&rsquo s population currently lives in Asia and over 1.3 billion people are expected be over 50 years old by 2025.

Both ITOCHU and Lippo will jointly conduct a detailed feasibility study for the establishment of a joint venture in Singapore to mutually develop healthcare business opportunities including but not limited to the following areas:

1. Collaboration in healthcare areas in Asian countries:
a) investment and operation of clinics, hospitals and other healthcare facilities in
countries such as Vietnam, Myanmar, Philippines, Malaysia, and Australia

2. Collaboration in healthcare areas in Indonesia:
a) development and operation of Japanese-style hospitals in Indonesia
b) investment and operation clinics, hospitals and other healthcare facilities

3. Collaboration in Other Areas:
a) business cooperation opportunities in construction and real estate industries
including the possible investment or involvement in REIT business and hospital construction projects
b) outsourcing of certain medical services which are typically conducted by
hospitals and clinics themselves in Indonesia and Asian countries, and to
establish separate entities to provide such services