SRE Group raises $130 million to complete restructuring

Small-cap Chinese real estate developer SRE Group has raised approximately $130 million from a combined sale of Hong Kong-listed shares and convertible bonds. The deal, which was completed on Monday night, is part of a broader balance sheet restructuring that also includes a buyback tender for the company's outstanding high-yield bonds and a relaxation of the covenants on those same bonds. The money raised on Monday will be used to pay for the buyback.

A restructuring was necessary since the 8.625% bonds due 2013 were restricting the company from taking advantage of the tentative pick-up in the China property market, but SRE didn't have the cash to buy back the bonds. The solution devised by Deutsche Bank, which is advising SRE on the restructuring, was to announce the buyback tender for the entire $200 million bond issue first, but make it conditional upon being able to raise the money to pay for it through the sale of new equity. Meanwhile, demand from equity investors was driven by the knowledge that the company was in the process of reducing its gearing and freeing up its balance sheet -- through a consent solicitation to get rid of the restrictive covenants -- to put it in a better position to capture the growth opportunities that are arising as the Chinese property market is starting to come back.

SRE focuses on mid- and high-end residential developments in Shanghai, Shenyang and Haikou. According to Moody's, it has a combined attributable land bank of 3.3 million square metres, which should be sufficient for five years worth of development.

Crucially, the company said last week that bondholders with about 78% of the outstanding principal amount had given their consent to remove the restrictive covenants, which was more than the minimum 75% needed to make this happen. The covenants were preventing further borrowing through a fixed-charge coverage ratio that the company had trouble staying above and made new equity issuance difficult since the chairman's stake wasn't allowed to fall below 40% (before this deal, the chairman controlled about 42.5%).

By June 18, the early tender deadline, investors holding a bit more than 64% of the outstanding principal had also agreed to tender at the fixed offer price of 80 cents to the dollar. Consequently, the equity and CB investors already knew that the first leg of the restructuring would be successful, barring that the company could obtain the necessary funds to pay for it.

Monday's fundraising, which account for a hefty 32% of the current market cap, was split roughly equal between the CB and the equity placement, which allowed the company to sell part of the equity at a premium. However, the conversion premium on the CB was set at a modest 10% over the reference price, which meant that the initial conversion price is actually at a small discount to the latest market price before the stock was suspended on Monday afternoon.