HONG KONG, Aug 4 (Reuters) - Taiwan High Speed Rail Corp (THSRC) has avoided defaulting on a NT$382bn ($12.05 billion) loan and potential bankruptcy after reaching an agreement with lenders and the government which paves the way for a debt restructuring, bankers said on Wednesday.
The rail operator agreed three amendments to the loan with lenders led by Bank of Taiwan on Monday, after THSRC signed an agreement with Taiwan’s Ministry of Transport and Communication on July 27.
The government agreement approved a long-awaited financial improvement plan that extends the rail operator’s concession to 70 years from 35 years and terminates the indebted company’s build-operate-transfer business model.
“The government has extended the operating concession from 35 to 70 years, it makes sense for us to extend the maturity on the loan,” one source familiar with the situation said.
THSRC, which connects major cities on the west coast of Taiwan, ran into financial difficulties due to overly optimistic passenger projections and expensive tickets as well as high depreciation costs on its equipment, including the trains, one source familiar with the project said.
THSRC declined to comment. Taiwan’s Ministry of Transport could not immediately be reached for comment.
THSRC will reduce its share capital by 60 percent under the restructuring plan and common equity shareholders will take a 60 percent haircut on their investments.
The government will then inject NT$30bn in additional equity through state-owned companies. This will increase their stakes to to 63.9 percent from 22.1 percent, while other large shareholder’s stakes will fall to 17.4 percent from 37.4 percent.
The government is still identifying which state-owned companies it will use to inject the additional capital into THSRC, sources said.
Large shareholders that will take losses on their investments include China Airlines Ltd, China Steel Corp, Continental Engineering Corp, Taiwan Sugar Corp, Teco Electric & Machinery Co Ltd, among others.
Restructuring the shareholding structure is contingent on the rail operator’s buyback of around NT$54bn of preferred shares, including NT$14.8bn of interest.
Several preferred shareholders have filed lawsuits against THSRC asking for the preferred shares to be redeemed since January, after Taiwan’s legislators rejected THSRC’s financial improvement plan.
THSRC needs funds to redeem the preferred shares but only has around NT$2bn of cash available along with NT$57bn, which is trapped in a bank account pledged to lenders to the NT$382bn loan and requires their consent to be released, sources familiar with THSRC’s bank accounts said.
THSRC had to agree three key amendments to the terms of the NT$382bn loan to convince lenders to release funds that will allow it to redeem the preferred shares after an earlier unsuccessful attempt to secure nine revisions to the loan in December.
The existing loan, which was completed in January 2010, comprised a NT$308.3bn tranche A, a NT$4.5bn 22-year performance bond tranche B, a NT$49.7bn 10-year term loan tranche C and a NT$19.5bn seven-year term loan tranche D.
Tranche A was further divided into a 22-year term loan A1 of up to NT$130bn, a 22-year term loan A2 of up to NT$178.3bn and a five-year guarantee facility tranche A3 of up to NT$27bn The sum of tranches A1, A2 and A3 could not exceed NT$308.3bn.
Banks agreed to extend the maturity of tranches A1 and A2 for 18 years, giving a total maturity of 40 years. Tranches A3, B, C and D are unchanged.
Banks also dropped claims to land development rights of five stations which provided some of the loan’s collateral.
The rights, which include claims to develop land around Chiayi, Hsinchu, Taichung, Tainan and Taoyuan stations, are worth about NT$22.6bn at market value, according to local media reports.
THSRC will hand back the rights to the government after it signs the agreement. In exchange for releasing the land rights from the collateral package, THSRC will have to set aside another NT$6.9bn in the bank account pledged to lenders.
The NT$57bn balance of available cash in the account, which is supervised by BoT, has accumulated since the rail operator started business in 2007, one of the sources said.
Lenders have agreed to release NT$39.2bn from the account for THSRC to buy back the preferred shares. The outstanding NT$14.8bn interest will be settled after the state-backed companies take control of THSRC, sources said.
“We are aware that this will put us at greater risk. However, it is the first step for the whole plan to work, so we have to do it,” one of the banking sources said.
Under the terms of the restructuring, THSRC will be able to amortise depreciation expenses over a longer timeframe, which will lower its costs and improve profitability in the short term.
The government is also planning to reduce ticket prices from NT$1,630 currently to the original price of NT$1,490 for a single journey from Taipei to Kaohsiung, one of the sources who attended the discussions said, with a view to encouraging more passengers to take the train.
Editing by Tessa Walsh