Kaisa's offshore bondholders to lose out

Offshore bondholders will suffer at the expense of equity holders in the Chinese developer’s latest debt-restructuring proposal, defying common capital structure norms.

(Update: Kaisa's conference call with bondholders in first subhead)

Kaisa’s latest debt restructuring proposal will hurt offshore bondholders and benefit equity holders, creating concerns that common capital structure norms are not being practised.

The Chinese property developer, which has some $4.8 billion of debt maturing in the current financial year, announced in a Hong Kong exchange filing on Sunday that it plans to swap its outstanding high-yield bonds with new notes, offering terms that are unfavourable to existing offshore bondholders.

In the proposal, Kaisa — which fell into financial distress amid project blockages and a corruption probe — aims to extend the tenors of all its senior notes by five years, slash coupon rates by 50%, and waive interest for the first two years. The developer also said that the principal amount will not be reduced.

Kaisa's offshore debt restructuring, if successful, will result in a loss to creditors relative to its original payment terms, fixed income experts said.

“It’s almost a pro-rata sharing of losses from equity to senior unsecured level,” Dhiraj Bajaj, fixed income portfolio manager at Lombard Odier, told FinanceAsia. “You are going against the typical waterfall structure and that is concerning.”

In a note on Monday, credit research firm Lucror Analytics said the proposal values Kaisa’s existing 2017 bonds at $65, indicating a $35 haircut.

Bondholders are usually ranked above shareholders in a bankruptcy payout scenario or when a company is in distress. In a typical capital structure arrangement, they usually only incur a loss after the holders of common equity, followed by those owning preference shares and hybrid structures, have absorbed all the pain they can. In Kaisa’s scenario, it has defied this market convention.

By looking to enhance its credit profile, the company's proposed debt restructuring would nonetheless help Kaisa to avoid being liquidated — a scenario that is untested in China and would yet have far wider repercussions. 

“Because there has been no offshore bond default in the past, nobody knows the actual process of liquidating a company and the offshore bondholders’ claim on assets,” one Hong Kong-based investor, who used to hold Kaisa’s debt and declined to be named, told FinanceAsia.

“So it’s between choosing which is worse — do bondholders share the losses and take a haircut while the equity holders are still around or do bondholders go down the route of trying to liquidate the company and perhaps not get anything at the end because they’re far away from the assets?” he said.

Threatening tone

Kaisa held a conference call with offshore bondholders on Monday morning. Some of the debtholders commented that the tone used was aggressive and threatening, according to Lucror Analytics in a note on Tuesday. 

Former deputy mayor of Shenzhen Wu Jiesi, who represented Sunac on the acquisition deal, chaired the call. He said that onshore debtholders, Kaisa employees and Sunac were running out of patience.

Wu also reiterated that the success of the debt restructuring is a prerequisite for the completion of Sunac's acquisition. He promised to resume Kaisa's operations and fulfill repayments if the deal goes through.

Some bondholders subsequently commented that the five-year extension of the maturity is too long and requested to shorten it to three or four years, added Lucror Analytics. Moreover, they are seeking clarification as to whether or not dividends will be stopped during the life of the proposed restructured debt. 

Pitiful recovery scenario

In a liquidation scenario, foreign creditors will likely recover just Rmb980 million ($156 million), according to Kaisa's Hong Kong exchange filing. The company has no credit lines to rely on and liquidity will continue to deteriorate if the current situation is not resolved quickly, it said.

"In this case bondholders might be better off just [taking] this proposal," said Lombard Odier's Bajaj.

Kaisa on March 8 provided an update of its precarious financial position. It said its total cash balance fell to around Rmb1.9 billion ($300 million) on March 2 from Rmb10.9 billion as at June 30, 2014.

The company also reported a drop in cash collections from property sales to around Rmb140 million in February 2015 from Rmb2.1 billion in November 2014.

“We continue to believe that Kaisa's liquidity position is unsustainable, given that its funding channels are effectively closed,” Dennis Lee, a credit analyst at Standard & Poor’s, said, adding that the debt restructuring could trigger a downgrade of the company. “The company estimates that its liquidity position is sufficient for only the first half of 2015."

According to the filing, both US dollar and renminbi-denominated high-yield notes will be part of the exchange exercise. This includes a Rmb1.8 billion ($290 million) 2016 bond and notes totaling $250 million, $800 million, $400 million, and $500 million that mature in 2017, 2018, 2019 and 2020, respectively.

Convertible bonds worth Rmb1.5 billion due in December 2015 are also included. The coupons are to be slashed to 2.7% from 8%, the statement said.

The developer will pay an early consent fee of 50 basis points to all bondholders if 50% and 66% of convertible bondholders agree to the proposal by March 20, before Kaisa publishes its annual results on March 31.

The announcement of Kaisa’s offshore debt restructuring comes shortly after the developer announced the restructuring of its onshore debt — which will also face a maturity extension of three to six years and an interest rate reduction.

Regulatory restrictions

Assuming that the debt restructuring proceeds as planned for both onshore and offshore creditors, Sunac's acquisition would still be dependent on the lifting of regulatory restrictions on Kaisa's sale of properties in Shenzhen and the resolution of its other business irregularities, credit analysts said.

Eleven of Kaisa’s projects have been blocked from sale by the Shenzhen government. Another 22 projects are blocked from sale or frozen by local courts due to pre-litigation asset preservation cases.

At the same time, the company is facing 80 pending litigation cases with onshore creditors, and claims of Rmb12.8 billion.

The resignation of chairman Kwok Ying Shin in December triggered a default in a company loan that was subsequently waived by HSBC, and was later followed by Kaisa's failure to promptly pay interest due on a bond, leading to fears of an unprecedented default.

The vice chairman, chief executive, chief finance officer and 170 employees — 7% of workforce — have also since resigned.

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