Xinyuan’s 1Q 16 earnings announcement disclosed repurchase of 3,624,240 ADS at a total cost of approximately $14.2mm during the quarter. This equaled:
- 18.5% of all share turnover during 1Q16
- 9.9% of the freely floating shares outstanding at 12/31/15 (excluding shares held by Chairman Yong Zhang, company co-founder Yuyan Yang, and TPG Group)
- The level of share repurchases was probably close to the maximum permissible under SEC rules (quiet period, time of day, last price, turnover).
Accretion of about $0.50/share in book value was created by the repurchases. Perhaps the company could have drawn attention to this huge benefit in the press release and conference call.
Xinyuan’s ability to repurchase shares and pay dividends when it has not met a “Fixed Charge Coverage Ratio” test is restricted by the terms of its bond indentures (amended February 2015)
Section 1.3 Amendment to Section 4.06(a)(B) of the Indenture. Section 4.06(a)(B) of the Indenture is hereby amended and restated as follows:
“(B) the Company could not Incur at least US$1.00 of Indebtedness under the proviso in Section 4.05(a); provided however that this clause (B) will not apply to (1) the declaration and payment of dividends by the Company with respect to the fiscal year ended December 31, 2014 in an aggregate amount not to exceed US$25.0 million (or the Dollar Equivalent thereof), (2) (x) the declaration and payment of dividends by the Company with respect to the fiscal years ended December 31, 2015, 2016 and 2017 and (y) the repurchase on or prior to December 31, 2017 of common stock of the Company pursuant to any share repurchase program approved by the Board of Directors, so long as, in the case of (2), the aggregate amount of dividends paid and/or common stock repurchased under (x) and (y) does not exceed US$35.0 million (or the Dollar Equivalent thereof) with respect to or during any given fiscal year prior to December 31, 2017, with any unused amount (representing the difference between US$35.0 million (or the Dollar Equivalent thereof) and the actual amount of dividends paid and/or common stock repurchased) with respect to or during any fiscal year prior to December 31, 2016 being carried over to the subsequent fiscal year;”
The company did not meet the “Fixed Charge Coverage Ratio” test at 12/31/14 or 12/31/15 and would have been unable to pay any dividends without this amendment. As amended, an exception of $35mm/year is available and any unused amount can be carried forward. 2015 dividends of $14.8mm and repurchases of $3.3mm left a balance of $16.9mm which means that total dividends and repurchases in 2016 are limited to $51.9mm. If dividends are about $14mm (reduced share count) then repurchases could be about $38mm of which about $14mm was used in 1Q leaving about $24mm for the remainder of the year.
The indenture restriction means that repurchases cannot continue at the 1Q16 pace, but Xinyuan was wise to use the available capacity when prices were low and it would have the greatest benefit. The aggressive execution of the buyback suggests:
- confidence in delivery of positive news over the remainder of the year
- recognition that the shares have been trading far below their fair value
- commitment to deliver value to shareholders through dividends and accretion