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[BEIJING] Kaisa Group Holdings's creditors need to allow suspension of payments to enable a debt agreement and avoid a bankruptcy that could wipe out their investments, said a manager hired by the company buying the Chinese homebuilder.
Meeting interest and principal obligations might derail debt restructuring talks because Kaisa can't honour all payments, said Wu Jiesi, a restructuring manager appointed by Sunac China Holdings, the developer buying Kaisa. A "satisfactory" resolution of Kaisa's debts is a precondition to completing the acquisition, he told Bloomberg News. Mr Wu was hired in January as Sunac's chief M&A and restructuring officer.
Kaisa, which is embroiled in an anti-graft probe, missed a coupon payment in January on dollar bonds due in 2020. It avoided becoming the first Chinese homebuilder to default on such securities when it met the obligation at the end of a 30- day grace period earlier this month.
Two more bond coupons come due on March 18 and March 19. Mr Wu said decisions on any noteholder losses will be made only after a Deloitte & Touche LLP audit of Kaisa's books and "there are many possibilities." "Sunac's acquisition of Kaisa is a commercial action and needs to be in line with all Sunac shareholders' interest," Mr Wu said by phone from Shenzhen on Feb 21.
"The interests of Kaisa creditors are also very important, and the best protection is Kaisa sustaining its operations."
Sunac Chairman Sun Hongbin said in a Feb 4 interview that even as he didn't want creditors to suffer losses, he needs time and revisions to some debt terms, without specifying.
A "reasonable" deal with creditors should give Kaisa a sustainable debt structure along with the capability for healthy operation and payment of rearranged debts, Mr Wu said.
Such a deal would strike a balance between Kaisa's creditors, minority shareholders and Sunac, according to Mr Wu. It would also treat onshore and offshore investors equally and be timely enough to avoid value destruction, he said.
"Wu definitely wants to protect Sunac shareholders while having discussions with creditors and the Shenzhen government, who might have an important role in the backdrop," said Nicolas Chan, an analyst who focuses on special situations at Louis Capital Markets (Hong Kong) Ltd.
"Sunac has the discretion to waive all conditions for the offer, including successful resolution of debt obligations. I'm optimistic about issues being resolved through further talks."
Kaisa's US$500 million of bonds due in 2020 slid 0.7 cents to 54.8 cents on the dollar as of 10.36am in Hong Kong, according to prices compiled by Bloomberg. The notes, sold to investors at 100 cents on the dollar in January 2013, slumped as low as 29.9 cents in early January.
The company's US$800 million of securities due 2018 were little changed at 54.4 cents.
Shares in Kaisa dropped 6.2 per cent, the most in almost two weeks, to HK$1.52. Sunac was little changed at HK$6.82.
Sunac bought a 49.3 per cent stake in Kaisa last month for HK$4.55 billion ($586 million) and proposed on Feb 6 to buy the shares it doesn't already own at HK$1.80 apiece.
The acquisition is conditional on Kaisa obtaining waivers from creditors and avoiding default on its existing debts, the two companies said when the deal was announced.
"It looks to me Kaisa and Sunac have the intention to make creditors happy, which was evidenced in the coupon payment earlier this month," said Gordon Ip, a portfolio manager at Value Partners Ltd., which managed US$12.9 billion of assets at of Dec 31. With regard to Kaisa's coupon payments due next month, "they may have the money but may choose to delay the coupon again as part of the restructuring negotiation with bondholders," he said.
Kaisa is seeking to expedite debt restructuring as it faces as much as 35.5 billion yuan (US$5.7 billion) of repayments to creditors this year, the homebuilder said in a Feb 16 filing. The company also said debts more than doubled to 65 billion yuan in the six months ended Dec 31, renewing concerns about its ability to pay creditors. Kaisa's debts are "more complicated than expected," Wu said without elaborating.
Kaisa needs to reach an initial agreement with creditors by the end of March so that Sunac can submit its acquisition plans for a vote at its shareholder meeting in April, Mr Wu said. While Sunac has made payments required by the stake purchase agreement with the founding Kwok family, it won't provide additional financial assistance to Kaisa, he added.
Kaisa's woes began late last year when the local government in Shenzhen, its home city bordering Hong Kong, blocked some of its projects from sale without giving a reason, straining cash flows. Those were Kaisa's best assets, with gross margins of 50 per cent to 60 per cent, according to Citigroup Inc.
Kaisa is also being probed about its links with a local official involved in an anti-graft investigation by the Chinese government, according to people with knowledge of the matter.
While the projects remain blocked, "I believe the government will support" Sunac's acquisition, Mr Wu said, declining to elaborate.
Mr Wu, 64, now also chairman of fund management company Shenzhen Fuhaiyintao Investment Management Partnerships LP, was vice mayor of Shenzhen before becoming an assistant governor of Guangdong province in 1998.
He was picked by Wang Qishan, who was then a deputy governor of the southern province, to help with restructuring of local companies, according to a 21st Century Business Herald report in 2010.
Mr Wang is now the ruling Communist Party's disciplinary chief, overseeing President Xi Jinping's anti-corruption drive.
An acquisition by Sunac remains the best solution for all parties, Mr Wu said. Should Kaisa file for bankruptcy, even creditors whose lending is secured by collateral can only recover less than half of their investments on average, while those without pledged assets may lose all their money, he said.
Still, Mr Wu said he doesn't rule out the possibility that Sunac may drop the deal if Kaisa fails to reach agreement with creditors.
"Kaisa needs to come up with a debt restructuring that's satisfactory to Sunac," Mr Wu said. "The best solution for creditors under current conditions is to make a rational choice and give appropriate concessions."