Kaisa left in limbo as Sunac drops deal amid debt talk impasse

[BEIJING] Kaisa Group Holdings Ltd, the first Chinese developer to default on offshore debt, had its restructuring thrown into doubt after rival Sunac China Holdings Ltd abandoned a proposed acquisition.

Kaisa bonds slumped the most in five weeks in early trade after Sunac announced Thursday that it dropped the offer that could have helped the troubled developer restructure its US$10.5 billion of debt, including US$2.5 billion of offshore bonds. Kaisa became China's first homebuilder to default on its US currency debt in April.

Sunac's decision came after months of negotiations with bondholders over terms of a rescue failed to make progress. Kaisa's founder Kwok Ying Shing, who resigned in December amid a government probe, returned as chairman in April, days after authorities lifted a four-month sales blockage that drained the company's cash flows.

Mr Kwok told offshore bondholders he may offer them a better restructuring proposal than the one Sunac made, raising questions about his intention to sell the Shenzhen-based company, people with knowledge of the matter said early in May.

"This is a negative headline for the Kaisa bonds given the significant uncertainty on the outlook of the company now Sunac has pulled out of the deal," said Guo Rui, a Hong Kong-based credit analyst at Mitsubishi UFJ Securities HK Ltd.

Kaisa's 2018 notes slipped 0.05 cents to 62.776 cents on the dollar as of 10:44 am in Hong Kong, paring losses. Sunac shares, which resumed trading in Hong Kong, fell 4.3 per cent to HK$9.34 as of 11:27 am, reversing an earlier gain of as much as 5.5 per cent. Kaisa shares are suspended.

The purchase was dropped because prerequisites for the sale weren't met, Tianjin-based Sunac said in a Hong Kong stock exchange filing. The conditions included a successful restructuring and refinancing of Kaisa's debt, and the resolution of business "irregularities," according to a Feb 6 statement when the transaction was first announced.

Sunac Chairman Sun Hongbin is dropping a deal initiated almost four months ago that would have given him a foothold in southern China.

The sellers of Kaisa's stock, the founding Kwok family, will have to refund HK$1.16 billion (S$202.7 million) to Sunac by May 29 and the same amount with interest would have to be refunded by Dec 28, according to the Thursday filing.

"While a blow to its expansion plan, it should be credit positive for Sunac from the cash flow perspective," said Guo of Mitsubishi UFJ. "But there could be some lingering concerns on the full refund of its pre-payments."

Tam Lai Ling, Kaisa's former vice chairman who resigned with Mr Kwok last year, has returned to the company to help lead the restructuring of its debt, according to an e-mail from Kirkland & Ellis to bondholders and obtained by Bloomberg.

Kaisa said March 31 its annual report is being delayed because auditors needed more time to verify its accounts, further hampering the talks with bondholders.

"It seems Kwok will propose another debt restructuring," said Glenn Ko, a Hong Kong-based credit analyst at UBS Group AG. "There are near-term uncertainties, but whoever controls Kaisa needs to sweeten the offer for bondholders in order to complete the debt restructuring."

BLOOMBERG