China property tycoons become creditors' labourers
Take Sunac China (1918.HK), opens new tab. The company is in talks to restructure its offshore debt for a second time. Two years ago it was the first among its peers to win approval to rejig its $9 billion offshore borrowings. At the time, it was agreed 30% of its dues would be exchanged for bonds that convert into equity, and the rest into new notes maturing in two to nine years.
Yet the real estate slump dragged on longer than expected and now the Tianjin-based developer is seeking a deal that would convert all of its dollar debt into shares, Bloomberg reported, opens new tab on Tuesday, citing unnamed sources. That would significantly dilute Chair Sun Hongbin's 26% stake given Sunac's diminished HK$16.5 billion ($2.1 billion) market value.
That puts the developer on a similar path to Kaisa (1638.HK), opens new tab, which said earlier this month that it has obtained approval to swap $13 billion of debt into new notes and mandatory convertible bonds. The latter carry an average conversion price of HK$4.17, some 23 times the current share price. Bondholders could end up owning 58% of the company.
In reality, creditors probably don't want the responsibility of running a Chinese developer. The high conversion price also points to a principal haircut down the line, given it's unlikely that the developer's shares will rebound so far so quickly. But the lenders do not have many alternative options. Kaisa has warned that offshore creditors might recover less than 2% of their unsecured holdings during a liquidation. And precedents on that front are not encouraging: there has been little progress since China Evergrande's (3333.HK), opens new tab liquidation was ordered by a Hong Kong court more than a year ago.
Large debt-to-equity swaps can help clean up Sunac and Kaisa. The current owners will hope that Beijing's expected economic stimulus shores up home prices and sales so the companies can repay their offshore debt before the notes they issue mature. Otherwise, China will have a new crop of reluctant property magnates.
CONTEXT
Kaisa Group announced on April 8 that a Hong Kong court approved its plan to restructure up to $13 billion of offshore debt.
Under the terms of the plan, the Shenzhen-based builder will swap the debt into new notes and up to $6.9 billion of mandatory convertible bonds. The convertibles will have an average conversion price of HK$4.17, or 23 times Kaisa's share price as of April 17.
Sunac China, a Tianjin-based developer seeking a second restructuring of its $9 billion offshore debt, is discussing a plan with major creditors to convert all their holdings into shares, Bloomberg reported on April 15, citing people familiar with the matter.
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