Kaisa mystery refuses to clear as China builder delays again

[HONG KONG] The first property developer from China to default on dollar bonds said last week it needed more time to release earnings already delayed by about two years. It's the kind of treatment bond investors have gotten used to.

Kaisa Group Holdings outlined an expected timetable in July to release earnings in December, before resuming trading in its Hong Kong shares this month. Now the Shenzhen-based company's public relations firm says its goal is to release the four overdue financial reports before the Chinese New Year holiday at the end of January, while management discusses the findings of the investigation into its debts.

Kaisa has faced more questions about its corporate governance after key findings from an FTI Consulting forensic accounting report were released last month, showing former company executives used undisclosed borrowing pacts in the runup to its default in 2015.

While a successful resolution of the Chinese dollar bond market's test-case delinquency would boost confidence, investors fret that developers including Kaisa are still putting expansion ahead of sound finances.

"One should start thinking deeper why is there a delay," said Raymond Chia, head of credit research for Asia ex-Japan at Schroder Investment Management in Singapore.

Kaisa's goal is to release 2014 full-year, 2015 full-year, 2015 interim and 2016 interim results before the holiday, its public relations firm iPR Ogilvy & Mather said in an e-mail response to questions. The FTI Consulting report's key findings cleared one hurdle for the company to resume trading and management are discussing them with an independent committee of the board of directors, according to the e-mail.

Kaisa's woes began when Shenzhen authorities blocked sales of some of its projects during a regulatory probe.

Founder Kwok Ying Shing subsequently agreed to sell the family's stake to Sunac China Holdings , only for its rival to drop the deal saying Kaisa accounts underestimated its troubles. Mr Kwok negotiated a debt restructuring completed in July last year.

The fact that Kaisa sold the debt through a Cayman Islands subsidiary gave investors less leverage during negotiations, said Charles Macgregor, head of Asian high-yield research at Lucror Analytics in Singapore.

"Investors need to be wary of reasons why a company is registered in the Cayman Islands, where the corporate law provides poor protection for oppressed minorities," Macgregor said.

Kaisa doesn't consider it appropriate to comment on such concerns, or anxiety over the reporting delay, iPR Ogilvy & Mather said in an e-mailed reply to questions.

Property bonds may be the riskiest part of China's debt market this year amid government efforts to cool prices, according to a Bloomberg News survey of analysts and traders. The firms' ability to repay debt with earnings is weakening.

Official accounts can understate the real scale of developer liabilities. FTI Consulting found certain former Kaisa employees attempted to obscure the existence of 41 borrowing pacts "through an elaborate scheme" including the creation of fictitious agreements from 2012 to 2014, according to the December statement.

The independent committee of the board recommended Kaisa seek legal advice regarding action against those involved in the "fraudulent scheme" and said there was no evidence to prove Kwok had breached his duty.

The price of the developer's 2021 dollar bonds has risen since the company negotiated easier repayment terms in July and their yield of about 12.2 per cent is "relatively attractive even with the restructuring history," said Glenn Ko, head of Asia desk trading strategy at HSBC Holdings in Hong Kong. "The liquidity of the company should be manageable given it can settle coupon with new bonds instead of cash in the coming one-two years."

The debt restructuring hasn't stopped the company's expansion. Kaisa said in November it plans to build a 30 billion yuan seaside resort and amusement park in Shenzhen by 2020.

In September, it said it will set up a fund of more than 10 billion yuan with Kaixing Capital to invest in sports events and stadiums. Mr Chia at Schroder said the extended earnings delay was symptomatic of lax corporate governance at some Chinese firms.

"If this can happen to one, it can happen to any company in China," he said. "Integrity of company management is ever so key nowadays, as opposed to just looking at surface fundamentals."

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