Kaisa sells properties but no white knight

Troubled property developer Kaisa raises $369 million from the sale of prime property sites to Sunac China but investors hoping for a white knight dump its bonds.

Troubled Kaisa has sold four prime property projects to Sunac China for Rmb2.3 billion ($369 million), giving the company some cash to keep it afloat but dealing a blow to offshore bondholders hoping for a white knight.

Previously, media reports had said that Sunac would buy a 49.3% stake in the Hong Kong-listed Kaisa, fuelling hopes that it would rescue the troubled developer. 

The appearance of a white knight is still possible and both Kaisa and Sunac's stock remain suspended. However, disappointed investors chose to dump the bonds. 

The key beneficiaries of the property sales are deemed to be Kaisa's onshore creditors. "The sale of Kaisa's projects doesn't necessarily benefit the offshore bondholders, given the proceeds will be first be applied to repay the onshore creditors," said Simon Wong, analyst at Moody's. “We think it doesn't have any immediate benefit for the offshore bondholders," he added.

A number of onshore creditors have already moved quickly to freeze Kaisa’s bank accounts.

For its part, Kaisa has given little indication as to who it will repay first, and in an exchange filing on Sunday night said it will the use the proceeds for general working capital to secure the company’s daily operations.

Offshore investors will be watching to see if it makes good on a missed $23 million coupon payment due on its $500 million 10.25% notes maturing in 2020. The company's 30-day grace period ends on February 7. If it fails to do so, Kaisa will be the first Chinese property to default on its offshore bonds.

Investment bank Houlihan Lokey is advising Kaisa on its debt restructuring.

No white knight in sight

The prime property projects that Sunac is buying from Kaisa are located in Shanghai and are hence unaffected by the bans on Kaisa's property sales in Shenzhen.

Kaisa has the option to buy back the projects from Sunac at a premium, as long as there is no change in control at Kaisa. Analysts view the change of control condition as a move by Sunac to safeguard its prime properties in the event Kaisa gets sold to another developer.

“If Kaisa ends up selling their stake to another controlling party, they won’t be in the position to get these prime properties back,” Chris Yip, analyst at S&P, said in a webcast on Monday.

Analysts say that Kaisa’s problems are likely linked to the Chinese government’s anti-corruption investigations, and a potential silver lining is that the government is likely to want to resolve it.

“We believe the government is incentivised to bring forward the resolutions particularly from a social stability angle, to ensure homebuyers and workers are pacified,” Yip told reporters.

However, investors who had bought Kaisa’s bonds Friday, on hopes that Sunac China would rescue it, dumped them on Monday sending the developers bonds plunging 11 to 15 points on Monday morning. 

"Investors were expecting Kaisa to be acquired by Sunac but it has turned out to be different from what was expected and the latest development does not give offshore investors much confidence," said Clifford Lau, head of Asia Pacific fixed income at Threadneedle, which does not have holdings in Kaisa bonds. "There is a lot of uncertainty investing in Chinese property bonds. There is insufficient transparency."

CEO quits

Further compounding Kaisa's problems, its chief executive officer Jin Zhigang has quit the firm with effect February 1. In an exchange filing on Monday, Kaisa said that Jin had tendered as he wishes to “devote more time to his personal career development.”

Kaisa has already been hit by resignations by key executives, including Kwok Ying Shing, the company's erstwhile chairman, vice chairman Tam Lai Ling and chief finance officer Cheung Hung Kwong.

With the swift departure on key management executives, it has been difficult to get clear information from the company. “We’ve been in constant contact with the management in Kaisa, but the amount of information they can share is very limited,” said Chris Yip, analyst at S&P.

Aside from its $23 million missing coupon payment, Kaisa has other looming debt due for repayment. The Shenzhen developer has an estimated Rmb5 billion ($801 million) worth of short-term onshore and offshore loans due in the first half of 2015.

In addition, there are two more offshore bond coupons due in March for its $800m notes 8.875% due 2018 and its $250m notes 12.875% due 2017.

The problems faced by Kaisa has raised the borrowing costs for Chinese property companies and a number of developers including Country Garden, Powerlong and Fantasia have offshore bonds that mature this year.

Despite this, Moody's Wong believes that the sector does not face dire refinancing challenges. "Offshore bond maturities for the China property sector are around $2 billion this year which is quite manageable for the sector," added Wong.

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