The first Chinese property company to default on its offshore debt sealed its return to the fold on Friday with the completion of an exchange offering and new bond deal that has put its operations back on a normal footing again.
Ever since it defaulted on a dollar-denominated issue in January 2015, Kaisa has been a poster child for the overleveraged Chinese property sector and the weak bargaining position of offshore bondholders with no direct claim on assets.
There was plenty of talk about potential white knights riding in to save the day, including fellow property developer, Sunac. In the end, it was bondholders and banks decision to grant a stay of execution, by waiving interest payments in favour of debt extensions, which enabled it to keep going.
As a result, bankers point out that Kaisa’s onshore or offshore bondholders never had to take a haircut when its debt was being restructured. It paints a very different picture to what the latter previously experienced during the Asian financial crisis when plenty of Indonesian borrowers simply walked away from their debts and local courts failed to uphold creditors’ rights.
Kaisa’s ability to survive ultimately depended on the Shenzhen government, which prompted the crisis in the first place when it blocked home sales in late 2014, citing business irregularities. Restrictions were partially lifted the following April.
And now, Kaisa hopes it has put the last few years behind it following an exchange of all of the payment-in-kind (PIK) bonds, which emerged from the restructuring process in July 2016, for standard Reg S Eurobonds with an attached new money issue.
Evergrande shakes market foundations
The exchange and new money offering should have been fairly straightforward since the PIK bonds were trading close to par when the exchange was announced. However, a simultaneous exchange and new bond issue by Evergrande threw a large spanner into the works.
Evergrande’s liability management exercise completed one day earlier than Kaisa's. But China’s largest property developer by sales upset the entire Asian investment community by raising billions of dollars more in new money than they had been expecting. Evergrande’s new triple-headed bond issue immediately traded down five points in the secondary market just as Kaisa was starting to build an order book for its own new money offering.
This made life exceptionally difficult for Kaisa in two respects. Firstly, fund managers felt they had been given a very salutary reminder about why large swathes of the Chinese property sector got themselves into trouble in the first place.
Hence the $1 billion in indications of interest (IOSs) Kaisa had built up prior to the launch of its own deal promptly disappeared.
“Fund managers were saying: I’ve just lost five points on Evergrande. Do you now expect me to do the same on Kaisa?” one banker commented.
Secondly, Evergrande’s secondary market trading levels shot Kaisa’s indicative terms to pieces.
The unrated group had gone out with four new tranches for a three-year, four-year, five- non-call three-year and a seven- non-call four-year bond.
Each tranche already had the following commitments through the exchange: $228.13 million for the three-year, $215.38 million for the four-year, $796.92 million for the five- non-call three-year and $1.42 billion for the seven- non-call four-year.
The proposed new coupons on each tranche were 7.25%, 7.875%, 8.5% and 9.375%.
These represented respective premiums of 162.5bp, 200bp and 62.5bp over the coupon rates of Evergrande’s four-year, six- non-call three -year and eight- non-call four-year bonds.
However, by the end of the first trading day, Evergrande’s three new bonds were yielding much wider levels of 7.48%, 8.585% and 9.7%
This meant the spread premium for Kaisa’s new four-year bond had collapsed 130.4bp to only 32.1bp over Evergrande’s. And the situation was even worse further down the maturity spectrum.
Kaisa’s 2022 bond and Evergrande’s 2023 bond are both callable in 2020. They were now trading flat to each other.
And Kaisa’s 2024 bond, which is callable in 2021 at the same time as Evergrande’s 2021, was now trading 32.5bp through it.
Kaisa builds round anchor orders
Yet Kaisa not only managed to price all four tranches, but also had the satisfaction of seeing each one just about hold their own during secondary market trading.
In the end, it was Kaisa that most closely resembled a white knight. Using words he probably never thought he would utter, one banker said: “Evergrande destroyed the market and Kaisa saved it.”
For by the end of the second day, Kaisa’s ability to clear the market also lifted Evergrande back a point or two.
Bankers said the key to getting Kaisa’s deal across the line was stitching together the new money component with anchor investors who wanted to hold the paper over the long-term and were prepared to ride any short-term volatility out. This meant there was very little loose paper during secondary market trading particularly from private banking accounts.
As a result, the new money component for each of the four tranches was just $56.87 million, $9.615 million, $23.08 million and $702.497 million.
In total, Kaisa raised $792.06 million from the new money component and printed $3.449 billion overall.
It had achieved very strong exchange ratios from the tender offering. This was probably because bond holders knew they would be shortly be redeemed at par if they did not participate whereas they were incentivized to do so by a 25 cents cash premium and a roll up of all accrued interest.
As a result, there was a 90.0% acceptance ratio for the $259.628 million December 2019 bonds, 93.97% for the $483.019 June 2020 bonds, 94.26% for the $592.159 million December 2020 bonds, 94.63% for the $648.505 million July 2021 bonds and 90.87% for the $674.626 million December 2021 bonds.
When these PIK bonds were first issued in July 2016, they had lower face values because of the way unpaid interest has been rolled up. At that point, they totalled $277.5 million, $499.4 million, $610.4 million, $665.9 million and $721.3 million
The completion of the exchange and new bond issue also means that Kaisa is now bound by less restrictive covenants governing debt as a percentage of total assets (now 35% compared to 25% on its PIK bonds).
In its online roadshow, the property group also pointed out that it has the support of online financial institutions, with an Rmb50 billion credit facility from Ping An Bank and a Rmb40 billion one from China Citic Bank.
During 2016, sales rose 222% year-on-year to Rmb29.8 billion and are up a further 30% year-on-year during the first five months of 2017 to Rmb14.3 billion. The ratio of cash (Rmb16.57 billion) to short-term debt is now 2.14 times compared to 0.1 times at the end of 2016.
In its online roadshow, the group also pointed out that it has a bigger land bank than many other double- and single-B rated names and implicitly, that it might be able to trade back to where many of them now are.
For example, Kaisa’s 7.2975% June 2020 bond closed its first day of trading around the same yield. This represented a 142bp premium to single-b rated Fantasia whose January 2020 bond was trading on a mid yield-to-worst around the 5.88%.