Kaisa to cut offshore bond coupons in second restructuring

[HONG KONG] Kaisa Group Holdings Ltd. said offshore creditors stand to recover just 2.4 per cent of their money in a liquidation, adding pressure on bondholders to accept a cut in coupon payments and defer repayment by five years.

The developer, which fell into financial distress amid project blockages and a corruption probe, is seeking to trim obligations on some 17 billion yuan (S$3.7 billion) of offshore debt. It earlier this month sought to reduce the interest on almost 48 billion yuan of onshore liabilities while extending repayment by up to six years.

Dollar-denominated notes sold by Chinese companies have returned 1.5 per cent this year, JPMorgan Chase & Co indexes show, less than Pakistan and the Philippines, amid concern other developers may suffer similar payment difficulties as the nation's real estate market cools. Sunac China Holdings Ltd bought 49.3 per cent of Kaisa on Jan 30, and made a takeover offer that's conditional upon a satisfactory debt restructuring.

Bondholders may be forced to accept the proposal because "they'll end up with a pathetic liquidation value should Sunac walk away," Cheong Yin Chin, a credit analyst in Singapore at independent research firm CreditSights Inc, said.

In a liquidation scenario, foreign creditors will likely recover just 980 million yuan, or about 2.4 cents on the dollar, according to Kaisa's Hong Kong exchange filing Sunday. 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.

"It will be a major turn of events if investors don't agree to this," said Raymond Chia, the head of credit research for Asia excluding-Japan at Schroder Investment Management in Singapore. "It's definitely a bad sign in tainting the assumption of no defaults in the industry." Kaisa narrowly avoided becoming the first Chinese real estate company to default on its US currency debt after paying a coupon on its 2020 bonds within a grace period last month. Several key executives quit late last year.

Kaisa's US$250 million 12.875 per cent notes due 2017 slumped 7.5 cents, the most in more than a month, to 50 cents on the dollar as of 2:55 pm in Hong Kong, Bloomberg-compiled prices showed, adding to a 10.7-cent tumble last week. Its US$500 million of 10.25 per cent notes due 2020 slid 4.7 cents to 50.8 cents, having lost 4.2 cents last week.

In Sunday's announcement, Kaisa proposed to cut the coupon on its April 2016 notes to 3.1 per cent from 6.875 per cent and lower the interest on its 2017 debt to 4.7 per cent from 12.875 per cent. Under the proposal, the coupon on its March 2018 debentures will be reduced to 5.2 per cent from 8.875 per cent, while that on its June 2019 notes will be trimmed to 6.4 per cent from 9 per cent.

Kaisa also proposes to lower the rate on its January 2020 securities to 6.9 per cent from 10.25 per cent, and reduce the coupon on its December 2015 convertible bonds to 2.7 per cent from 8 per cent. The developer retains the option to issue payment-in-kind notes to bondholders up to 2017, in lieu of coupon payments, it said.

"The offer looks like the easy way out of the predicament as there is no clear options for bondholders," said AJ Lee, a money manager in Taipei at Cathay Securities Investment & Trust Co. "They can look for another white knight but it's unlikely because of the tremendous time pressure to complete this." Cathay sold its holding of Kaisa 2018 notes in December and January, and doesn't plan to buy them back because of the restructuring uncertainty, Mr Lee said by phone today.

Frozen assets and litigation are disrupting Kaisa's normal operations and affect the going-concern value of the company, Kaisa said in yesterday's filing. Deteriorating liquidity is putting increasing stress on its business and weakening its capital structure, it said.

Cash collections from property sales has "dropped significantly" from about 2.1 billion yuan in November to 143 million yuan in February. "Consequently, the company's total cash balance has decreased from 10.913 billion yuan on June 30, 2014 to 1.897 billion on March 2," Kaisa said.

"The company expects its liquidity to continue to deteriorate if the current situation is not resolved quickly," Kaisa said. No liquidity lines are available to draw from and "absent the release of the sale blockages and frozen assets in the near term, the going concern value of the company could be significantly impaired." Downside Risk The restructuring plan suggests the value of Kaisa's five existing high-yield dollar bonds lies from high 40 cents on the dollar to mid 50 cents on the dollar, Bank of America Corp analysts estimated in a report today. That implies a price downside of as much as 12 cents.

"While we do not exclude the possibility that a better restructuring plan might be ultimately negotiated between the company and the offshore creditors, we believe the probability of such is relatively low and the magnitude of such upsides are uncertain," Hong Kong-based analyst Joyce Liang wrote. "We believe the risk reward profile may start to look more attractive if the bonds traded at about the 45-cent level. But at current valuation of between 55 and 60, risks seem to be skewed to the downsides." Kaisa, which also owes HK$760 million in loans to HSBC Holdings Plc and about US$179.5 million to Industrial & Commercial Bank of China (Asia) Ltd, is seeking to win consent to its restructuring plan by March 20.

It proposes to pay an extra 50 basis points of interest on the restructured debt as an incentive if more than half of the high-yield noteholders support the plan and more than 66 per cent of convertible bondholders approve the terms.

Last week, Kaisa sought to cut the interest on its onshore obligations to as little as 70 per cent of the base rate set by the People's Bank of China, its March 2 filing showed. A substantial majority of onshore creditors will also face impairment, it said yesterday.

BLOOMBERG