The new Chinese owner of Darwin Port is heavily indebted and has struggled to make interest payments on money borrowed to buy the lease, raising doubts over promises to upgrade the port and fund a new $200 million hotel on a nearby site.An analysis of the finances of the Landbridge Group and its billionaire founder Ye Cheng shows he does not fit the stereotype of a cashed-up Chinese billionaire with access to cheap funding from state-owned banks.
Rather, Landbridge’s local accounts and documents lodged in China show an over-extended company scrambling from one loan repayment to the next and paying up to 12 per cent interest on some borrowings.
The company is equally exposed to refinancing risks in China’s volatile debts markets, where it has been forced to scrap four bond issues in the last two years.
Landbridge’s funding challenges became more acute on Tuesday when it failed to sell a 20 per cent stake in the Darwin Port to an Australian entity, as prescribed in the original sale agreement with the Northern Territory government
This leaves the company without a timely cash injection and raises doubts over whether any local party could make the numbers work at Landbridge’s $506 million purchase price. The Northern Territory will retain a 20 per cent legal interest in the port, but hold no economic interest.
In an effort to overcome its funding challenges Landbridge has sought to link its port projects in Darwin and Panama with Beijing’s larger strategic aims in the hope of securing cheaper financing from the state.
It is known to have sought a $500 million loan from the Export-Import Bank of China (Exim), a state-backed policy bank which sits under the country’s cabinet. Exim’s mission is to support “China’s foreign trade, investment and international economic cooperation”, according to its website.
Mike Hughes, the vice-president of Landbridge Australia, would not say if the loan with Exim or another lender had been agreed, while stressing the port was purchased during a low period in the cycle and future earnings were expected to increase strongly.
He said this would be driven by a pick-up in oil and gas volumes and the resumption of manganese exports, while Landbridge was working towards making Darwin an export hub for Asia.
“We are on-track building Darwin’s future as an export gateway to Asia,” he said.
Any new funding agreement from Exim would go some way to ease Landbridge’s financial issues and, contrary to speculation, would not trigger an automatic review by the Foreign Investment Review Board.
A spokesperson for Treasurer Scott Morrison said a clause in the agreement allowed the Northern Territory government to terminate the lease in the event of a loan default, meaning the “Darwin Port will not come under the effective control of a Chinese bank”.
The original sale of the 99-year lease over the Port of Darwin did not require FIRB approval and was only considered by the Defence Department at a junior level even though, as Australia’s most northerly port, it was considered a vital strategic asset.
These laws have since changed after the sale exposed major gaps in the national security considerations around the sale of critical infrastructure assets to foreign buyers and former US President Barack Obama raised concerns about the deal.
But even if Landbridge can secure the new debt facility, it remains unclear how it will deliver on its promise to spend $35 million upgrading the port over five years and other commitments in Northern Australia, as the port is uneconomic under the current structure and reliant on subsidies from its Chinese parent company.
Accounts filed with the corporate regulator show Landbridge Infrastructure Australia is thinly capitalised and only solvent because its Chinese parent deferred interest payments in the 2016 financial year.
The accounts show the port generated just $6 million in earnings before interest, tax, depreciation and amortisation (EBITDA) in the 2016 financial year, excluding one-off charges related to the acquisition.
This is insufficient to cover an annual interest bill of at least $15 million.
The accounts show the Landbridge vehicle where the Darwin Port is held has borrowing of $406 million and contributed equity of $105 million, although it declared $99.6 million of this debt was a “non interest bearing” loan from its parent company.
The accounts showed just $23,000 in interest was paid in the 2016 financial year.
Mr Hughes from Landbridge confirmed interest payments on inter-group debt had been “deferred” but said the company could fund the remaining port upgrades from its forecast cash flows.
The Landbridge filings cover the first 7½ months since it took control of the port on November 16, 2015, and so to provide an annual perspective The Australian Financial Review has extrapolated the numbers out for the full 12 months.
“On any sensible assumptions it is impossible to see how you could pay $506 million for this asset,” said one infrastructure specialist who examined the accounts and asked not to be named.
He said a purchase price of $250 million for the port’s 99-year lease was even aggressive, given its current cash flow could only support debt of around $100 million.
The Financial Review has also confirmed inside Landbridge there were serious concerns about the amount paid for the port and the ability of the company to finance the acquisition along with its other northern Australia developments.
The infrastructure specialist said the auditors would have most likely only signed off on the accounts as they were confident Landbridge had the financial support of its Chinese parent.
To be viable in the future the port either needs to see a substantial pick-up in cargo volumes, as Landbridge is forecasting, or to reduce its debt load.
Given the company’s tight financial position it also remains unclear how it plans to fund the promised $200 million six-star hotel on a nearby site.
Early work on the hotel was originally planned for this year. However, a key approval was delayed by the Northern Territory’s Development Consent Authority, pushing the start date back to next year. One source said the delay was also affected by Landbridge’s funding issues.
Landbridge denies this and Mr Hughes said the project would be funded by a combination of group debt and equity.
The Darwin Port is also competing for funding with the other international investments of Landbridge’s Chinese parent, including its heavy financial commitments to a project in Panama.
It has committed to spend as much a $US900 million ($1.2 billion) buying and upgrading the Margarita Island Port, which sits at the mouth of the newly upgraded Panama Canal. A year after it purchased the port, Panama swapped its diplomatic recognition from Taiwan to Beijing.
The company has sought to link both the Panama and Darwin projects with Beijing’s global infrastructure play, known as the Belt and Road Initiative, which should help it secure financing from state-backed institutions.
Disclosures in China show Landbridge needs longer term more secure financing, as it has scrambled to secure and refinance loans before and after purchasing the Darwin Port.
According to its 2016 annual report Landbridge has 20.9 billion yuan of debt ($4.2 billion) on assets of 32.1 billion yuan, a hefty gearing ratio of 65 per cent.
This debt is up from 11.1 billion yuan three years earlier.
A notice issued by the Shanghai Clearing House, which regulates bond issuances, indicates Landbridge planned to partially finance the Darwin deal through a 1 billion yuan ($250 million) three-year note issued in June 2015.
This deal was subsequently cancelled due to “market fluctuations”, forcing the company into a series of smaller and shorter duration issues.
The disclosures show between June and October 2015 Landbridge secured 1.5 billion yuan ($300 million) from three different bond issues, for a duration of between one and three years.
The company then sought additional finance in China’s high-yield shadow banking market.
Between July and September 2015 it borrowed a further 2.35 billion yuan ($470 million), according to disclosures by its lender the Anxin Trust.
In a separate disclosure Landbridge said one-year loans from the Anxin Trust attracted an interest rate of between 10 per cent and 12 per cent.
These filings indicate Landbridge borrowed at least $770 million in the months leading up to its Darwin Port acquisition from the high-yield market and the local bond market.
In 2016, filings show it cancelled three other bond issues due to “market fluctuations”.
The issue for the company is a so-called “funding mismatch” because it has used short-term borrowings of between one and three years to purchase the lease over a long-term asset.
Much of this debt will therefore need to be refinanced in the middle of next year, which indicates why Landbridge has sought the $500 million loan from the Exim Bank.
In May, Landbridge’s other major Australian asset, resource company Westside, reported a $6.65 million loss for the 2015-16 financial year.