China Evergrande will swap defaulted debt in court restructuring
CHINA Evergrande Group, once among China’s biggest developers and now a poster child for its property crisis, laid out details of a multi-billion dollar restructuring plan that calls for its offshore creditors to swap their debt for new securities.
The proposal, released on Wednesday (Mar 22) and coming 15 months after Evergrande first defaulted on its public dollar bonds, addresses debt tied to China Evergrande, its Scenery Journey unit and offshore financing arm Tianji Holding.
China Evergrande bondholders can receive new bonds maturing in 10 to 12 years or a combination of new notes and instruments tied to the shares of Evergrande’s property-services unit, its electric-vehicle division or equity of the builder itself, the company said in a Hong Kong Stock Exchange filing. Scenery Journey creditors are slated to get US$6.5 billion of new bonds, while Tianji investors will receive US$800 million of new notes.
For the first two-and-a-half years, interest on the new notes can be paid in cash or in kind, meaning with more debt.
“The plan is not perfect,” but rather a compromise and “better than nothing”, said Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group. She doesn’t see China Evergrande’s bond curve moving much, adding, “It could make investors more cautious when investing in distressed developers.”
China Evergrande said the debt restructuring would allow it to focus on returning to normal operations. That will require additional financing of 250 billion (S$48.4 billion) to 300 billion yuan to “ensure delivery of properties”, the company said. Tianji will require an estimated 1 billion to 2 billion yuan.
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“The risk this can’t be covered by unleveraged free cash flow from its projects means there could be prolonged delay in completing some of its 1,316 projects,” wrote Bloomberg Intelligence analysts Kristy Hung and Lisa Zhou. “This would be a fresh blow to buyer confidence in private developers’ projects just as China’s housing sector is starting to recover.”
The debt restructuring will be implemented through schemes of arrangement or other proceedings that may take place in courts in the Cayman Islands, Hong Kong and the British Virgin Islands, the company said.
China Evergrande bondholders will have about US$31.7 billion in outstanding principal as of the restructuring’s effective date, which the company estimates will be in October. The ultimate recoveries would depend on the performance of the securities that bondholders choose.
In the case of Scenery Journey creditors, they will have US$5.2 billion in outstanding principal, meaning that the new debt of US$6.5 billion could lead to a recovery of more than 120 US cents on the dollar if obligations on the new notes are met.
Scenery Journey’s 13.75 per cent bond due in November 2023 were last quoted at around 6 US cents on the dollar while China Evergrande’s 8.75 per cent note due in 2025 were around 9 US cents, according to data compiled by Bloomberg.
If the restructuring isn’t successful and China Evergrande liquidates, unsecured offshore debt holders would recover around 9.73 billion yuan, according to the company. That means noteholders would stand to recover 2.05 per cent to 9.34 per cent depending on what securities they hold.
China Evergrande, which is still the world’s most-indebted developer, said during a court hearing this week that a restructuring support agreement is expected to be ready by month’s end. An ad-hoc group of offshore bondholders expressed backing for the company’s debt overhaul plans after terms were sweetened, Bloomberg reported on Sunday.
The signs of progress allowed for a winding-up petition against the builder to be adjourned to Jul 31.
China Evergrande missed several self-imposed 2022 deadlines to disclose a debt-restructuring framework. The overhaul will be among the country’s largest ever — potentially impacting banks, trusts and millions of homeowners. It could also provide guideposts for other developers’ restructurings.
Questions about China Evergrande’s debt-repayment abilities fuelled broad worries about Chinese builders in the wake of a government-led leverage crackdown that squeezed developers’ liquidity. Property firms defaulted on a record amount of dollar bonds last year.
Several peers have been making progress of late on their own debt restructurings. That includes China Fortune Land Development, which issued US$5.1 billion of new dollar bonds nearly two years after becoming the first property firm to default in the wake of the debt clampdown. BLOOMBERG
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