Developer China Fortune Land’s debt plan meets with resistance

Published Wed, Sep 21, 2022 · 06:59 PM

The first Chinese developer to default under government steps to curtail the sector’s debt growth faces creditor opposition to a long-awaited offshore restructuring plan, which seeks to push out repayment by 8 years.

Advisers of an ad-hoc group of China Fortune Land Development dollar-bond holders plan a call open to all such creditors at 6 pm Hong Kong time on Thursday, during which they will explain why the offer released last week shouldn’t be supported. The builder didn’t immediately respond to a request for comment, but CFLD says in its proposal there’s no alternative plan for the US$4.96 billion of outstanding dollar notes if it’s not consummated. 

CFLD was the first casualty of the government’s efforts to curtail debt growth in the leverage-laden real estate sector, defaulting on an offshore bond in early 2021. It was one of the initial signs of the liquidity crunch that’s enveloped Chinese developers since.

The ad-hoc group, which respectively has Latham & Watkins and Alvarez & Marsal as its legal and financial advisers, said in February it represented holders of more than 25 per cent of CFLD’s dollar-note principal outstanding, an amount sufficient to block restructuring plans. 

Under a “best-case scenario” that includes completing asset sales, bondholders under CFLD’s proposal may be able to recover about 30 per cent of their original notional investment by the end of 2023, Credit Suisse credit analyst Daniel Tam estimated in a note Tuesday. Holders can also receive a 1 per cent cash prepayment fee if they vote for the plan by 5 pm HKT on Oct 13, but Tam said that amount would be deducted from a 2023 bond payment.

The plan somewhat resembles CFLD’s onshore restructuring effort, but “the question is whether it can be passed and whether one believes it can be executed,” said Anthony Leung, head of fixed income at Pollock Asset Management. “Its current bond price is not reflecting the successful execution of such plans.”

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CFLD’s dollar notes have climbed from August lows along with China’s high-yield market overall, but the firm’s bonds are little changed this week at below 15 cents on the dollar, according to prices compiled by Bloomberg. 

The developer’s restructuring case underscores the potentially lengthy and difficult process for bondholders to recover values from a sector where offshore defaults are occurring at record levels. Most Chinese builders that have missed dollar-bond payments have yet to present a restructuring plan, and impatient creditors are increasingly turning to courts for resolution. 

CFLD’s onshore restructuring, reflected by proposed asset sales and payout amounts, “shows a relative lack of progress compared with market expectations, hence it is reasonable for offshore bondholders to be skeptical of the plan,” said Pollock’s Leung.

Friday’s plan reiterated the company’s target to raise about 75 billion yuan (S$15.04 billion) from divestitures, with 57 billion yuan of that going toward debt repayment. In an onshore filing last week, CFLD said it initiated arrangements to make two batches of cash repayments totalling 1.9 billion yuan to some creditors. BLOOMBERG

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