Kaisa given respite but is still in the doghouse

Kaisa handed waiver by HSBC on loan breach but investor confidence stays shaken as it fails to make bonds coupon payment.

Chinese property developer Kaisa has been handed some respite after it emerged lender HSBC waived a breach on its loan, averting a potential cross default on its offshore bonds.

Kaisa's $51 million HSBC loan was supposed to have been in default due to the resignation of its erstwhile chairman Kwok Ying Shing, which breached one of the covenants with HSBC.

Although this is no longer an issue, the troubled property developer is a long way from digging itself out of its financial hole.

In an exchange filing on Monday night, the company confirmed that it failed to make an interest payment of $23 million for its $500 million 10.25% notes due in 2020 which was due January 8.

This means the company is in technical default on those bonds. However, it still has a 30-day grace period, which is expected to expire around February 7. Law firm Kirkland & Ellis is advising the adhoc committee of bondholders.

Kaisa said it is currently in discussion with several institutions including international investment banks to appoint a financial adviser and it is expected to make appointment shortly.

There was a mixed reception to the latest update from the developer. “It is positive that Kaisa managed to get a waiver from HSBC and is appointing a financial adviser to sort out the current situation,” said Chris Yip, an analyst at S&P.

“But at the same time, Kaisa is coming out with more information that onshore creditors are freezing its accounts, which will make some of their operations more difficult, so it’s a mixed message. A lot depends on how they progress with how their negotiations go,” he added.

As of January 9, several of Kaisa’s bank accounts were frozen and under investigation by banks. The total bank balances that were frozen were about Rmb447 million ($72 million) and Rmb266 million ($42 million).

Kaisa desperately needs to resolve confidence as onshore lenders and project partners have already taken action against the company.

Last week, the company said that partners for two urban redevelopment projects in China have alleged that Kaisa has breached cooperation agreements and want to terminate the agreement and demand a refund of Rmb1.2 billion ($192 million) in fees. A lender affiliated with the project partners has also declared that the fees and outstanding amount is immediately due.

“The company needs to deal with projects without restrictions,” said Charles Macgregor, head of Asia at credit research firm Lucror Analytics. “It is important, therefore, to quickly formulate a feasible plan and communicate it to bankers and investors in order to restore confidence.”`

In the dark

For many years, Kaisa was praised for being one of the more transparent Chinese corporate borrowers. But this perception changed in recent weeks due to the lack of communication after several key executives left.

In fact, the news of Kaisa's covenant waiver was received with skepticism from fund managers, who are still being kept in the dark with regards to certain issues.

This includes the reason why Shenzhen authorities blocked the sale of unsold units in some of Kaisa’s property projects back in December, the developer’s current onshore and offshore cash position as well as the group’s outstanding liquidity situation.

As of June 2014, the company had about Rmb9.6 billion ($1.5 billion) of cash and short term deposits, and it therefore came as a surprise to analysts and investors that the company was initially unable to make payment on the relatively small $51 million HSBC loan and subsequently missed its $23 million coupon payments on January 8.

“We still do not know what is happening behind the scenes,” said Dhiraj Bajaj, fixed-income portfolio manager at Lombard Odier, adding that, although his firm does not hold Kaisa’s debt, it has exposure to higher quality names in the sector.

“It’s fine for a company to default if you know that their credit metrics have been weakening and debt service is getting increasingly challenging,” said Bajaj. “What is not fine is for a company that was trading above par to suddenly trade down 70 points for reasons that we still do not know. Corporates don’t go bust overnight.”

Kaisa's stock remains suspended but its bonds continue to trade and they have been plummeting. Kaisa's 2019 and 2020 bonds, which were trading at par over a month ago, sank to 33 and 34 last Wednesday, according to Bloomberg data. But the notes have since rebounded by at least six points after announcing it was seeking a financial adviser to help restructure its debt.

Losing out

After having its onshore bank accounts frozen, the struggling Chinese developer plunged further into crisis after receiving a court ruling — also on January 9 — that the sale of a Shanghai asset to Vanke China, announced on December 31, has been terminated by mutual agreement.

Kaisa had previously agreed to transfer equity interests and shareholder’s loan in the Shanghai Qingwan Zhaoye project to Vanke for Rmb1.2 billion ($190 million).

It is unclear if this is a sign that Kaisa has found other means of liquidity other than selling the assets, said credit analysts.

“If there’s anything that they should be doing at the moment, it would be to sell their assets to enhance their cash position…not so much for the repayment of the coupon of its US dollar bond, but more to demonstrate to domestic banks that they’re still a viable organisation,” said Macgregor.  

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