Kaisa Crisis
The recent financial crisis of Kaisa Group Holdings Ltd. (“Kaisa”), a large-scale Chinese property developer listed on the Hong Kong Stock Exchange (“SEHK”), has been in the headlines for several months. The Kaisa crisis began with the resignation of its chairman, which triggered the prepayment provision of a US$400 million loan to HSBC Holdings PLC.1 Credit rating agencies Standard & Poor’s and Moody’s Investors Service have downgraded Kaisa’s debt to ratings that reflect an expected default.2 Kaisa also missed an interest payment of approximately US$26 million in January 2015 on its US$500 million 10.25% offshore3 bond due in 2020. Several of its bank accounts have been frozen and put under investigation by several banks.4 Various applications in relation to the preservation of group assets have also been filed by creditors5, hurting its ability to sell off projects to raise funds and pay back lenders.
The Kaisa crisis has triggered broader concerns for the PRC6 property market and its ability to continue accessing offshore funding markets. The potential for a default by Kaisa added to the pressure on PRC’s heavily indebted property market, which was already struggling with a weak housing market and difficulties in raising cash to pay back loans amidst economic slowdown. While some observers considered Kaisa an isolated event, others feared that more defaults in the PRC property market were likely to follow.7
When the Kaisa situation seemed most grave, a white knight appeared. On February 1, 2015, Kaisa announced that the Tianjin-headquartered luxury developer Sunac China Holdings Limited (“Sunac China") had agreed to acquire Kaisa’s equity interests in, and the shareholders’ loans to, four prime property projects in Shanghai, subject to certain conditions. Further, on February 6, 2015, Sunac China and Kaisa jointly announced that Sunac China had agreed to acquire a 49.25% stake in Kaisa from the Kwok family for HK$4.55 billion (equivalent to8 approximately US$590 million) in cash consideration, subject to the approval by Sunac China’s shareholders and satisfaction of certain conditions on or before July 31, 2015, including the unfreezing of assets, restructuring and refinancing of a part or all of the existing debts and non-occurrence of default.9 The acquisition by Sunac China, upon completion, will trigger a mandatory cash offer for all of Kaisa’s issued shares (other than shares held by the offeror and certain non-acceptance shares, including a 29.94% stake held by Funde Sino Life Insurance Company Limited, Kaisa’s second-largest shareholder, which undertook not to tender its shares in the mandatory offer), outstanding share options and convertible bonds. Post completion, Kaisa will remain a listed entity and, if necessary, Sunac China will sell a part of its stake to restore a 25% public float. Following the aforementioned announcements, Kaisa made the missed interest payment of approximately US$26 million just before the extended February 7 deadline.
Kaisa’s Offshore Debt Restructuring Plan
On March 8, 2015, Kaisa issued an announcement detailing its troubles and proposing a new offshore debt restructuring plan (the “Plan”).10 According to the announcement, as at December 31, 2014, Kaisa’s total interest-bearing debt amounted to RMB 65.0 billion (equivalent to approximately US$10 billion), representing an increase of RMB 35.2 billion (equivalent to approximately US$6 billion) from June 30, 2014. As of January 31, 2015, 11 of Kaisa’s projects were blocked from sale or subject to the restrictions imposed by the Shenzhen Municipal Government, while 22 projects were blocked from sale or frozen by local courts due to pre-litigation asset preservation. Kaisa also received notices from its creditors (including project partners) demanding an immediate repayment of approximately RMB 28 billion (equivalent to approximately US$5 billion). As of March 1, 2015, Kaisa was facing 80 pending litigation cases with onshore creditors and claims totaling to RMB 12.8 billion (equivalent to approximately US$2 billion). In addition, Kaisa’s senior management personnel, including its Vice Chairman, the CEO and the CFO, as well as more than 170 employees (approximately 7% of its total number of employees), have left Kaisa. Kaisa stated that its liquidity position has been significantly impaired in light of the business disruptions and onshore litigations and that, absent the release of the sale blockages and frozen assets in the near term, its going concern value could be significantly impaired.
Kaisa also disclosed that, in case it is forced into liquidation, based on a preliminary review, the estimated recoveries to offshore creditors in a liquidation are expected to be approximately RMB 980 million (equivalent to approximately US$158 million), or approximately 2.4%. Kaisa has imminent maturity for approximately RMB 29.8 billion (equivalent to approximately US$5 billion) of debt in the next 12 months, and its indebtedness includes five outstanding notes issuances (RMB 1.8 billion 6.785% Senior Notes Due 2016; US$250 million 12.875% Senior Notes Due 2017; US$800 million 8.875% Senior Notes Due 2018; US$400 million 9.00% Senior Notes Due 2019; and US$500 million 10.25% Senior Notes Due 2020), convertible bonds (worth RMB 1.5 billion (equivalent to approximately US$240 million)) and outstanding HSBC and ICBC offshore loan facilities. Kaisa noted that, unless it restructures its existing debt facilities, it will not be able to service obligations as they come due.11
The Plan proposed that each series of the existing notes will be exchanged for a corresponding series of new notes with a longer maturity date (extended by five years) and a lower interest coupon (reduced by an average of approximately 44%), but there will be no reduction of principal. The covenants, guarantees and collateral under the new notes will be substantially similar to the existing notes. Kaisa’s convertible bonds will also be amended by extending their maturity date and reducing the interest coupon. For a period of two years, Kaisa will have the right to elect to make interest payments on the new notes / new convertible bonds “in kind”, i.e. by issuance of additional notes / convertible bonds, rather than paying interests in cash. Restricted payments and permitted investments baskets under the existing notes were proposed to be modified to provide incremental operating flexibility to Kaisa. Change of control provisions were proposed to be expanded to include the Chairman of Sunac China, Sunac China and their respective affiliates. Kaisa intended to enter into the Restructuring Support Agreement with holders of the existing notes and the convertible bonds to support the implementation of the Plan by March 20, 2015. The Plan was announced shortly after Kaisa’s announcement of the onshore debt restructuring, which also proposed a maturity extension of three to six years and an interest rate reduction.12
The Plan is recognized as a special deal under Rule 25 of the SEHK’s Takeovers Code and is, therefore, subject to consent of the Executive Director of the Securities and Futures Commission’s Corporate Finance Division, approval by Kaisa’s independent (disinterested) shareholders at a general meeting and a positive opinion of the independent financial adviser to Kaisa’s independent board committee. A shareholders meeting to approve the Plan was proposed to be held in April 2015. Quam Capital Limited was appointed as the independent financial adviser to the independent board committee.13
Kaisa stated that, given the seriousness of its troubles (for instance, Kaisa is projected to run out of liquidity by the end of March 2015), it must reach an agreement with creditors by the end of March 2015 in order to complete all aspects of the restructuring before Sunac China’s shareholders meeting in April 2015, with the final implementation to be completed before July 31, 2015 under the acquisition agreement.14
Kaisa’s offshore debt restructuring, if successful, will result in a loss to creditors relative to its original payment terms, according to some experts.15 Bondholders are usually ranked above shareholders in a bankruptcy payout scenario or when a company is in distress. In a typical capital structure arrangement, they usually only incur a loss after the holders of common equity have absorbed all the losses they can, followed by those owning preference shares and hybrid structures. Kaisa’s scenario has defied this market convention, and as it has never been tested in the PRC, it would yet have far wider repercussions. As some experts noted, it is between choosing which is worse for bondholders: to share the losses and take a haircut, or go down the route of trying to liquidate the company and perhaps not get anything at the end because they are far away from the assets.16
On a conference call held by Kaisa with its offshore bondholders the day after the Plan was announced, bondholders commented that the five-year extension of the maturity was too long and requested to shorten it to three or four years. They were also seeking clarification as to whether or not dividends will be stopped during the life of the proposed restructured debt.17
On March 22, 2015, Kaisa announced that it is still negotiating with offshore bondholders, and that it has not yet reached an agreement with them regarding the Plan.18 As noted in the press, this means that the Plan as initially proposed by Kaisa was rejected by offshore bondholders, and the next step is to renegotiate the terms.19 The risk is, if bondholders push back, Sunac China, which has conditionally agreed to acquire Kaisa, may walk away from the deal. In that case, Kaisa’s cash flow and viability will come under further strain.20 There are also expectations that the Shenzhen Municipal Government, Shenzhen being the city where Kaisa is headquartered, will arrange for state-owned property companies to buy Kaisa. The widely speculated buyer is Overseas Chinese Town, although it has denied these speculations.21
So far, Kaisa has not yet announced whether onshore lenders have agreed to extend its debts or cut interest rates. Neither has it said if separate agreements have been reached with HSBC and ICBC on their respective loans.
Developments in the PRC Property Market
Meanwhile, international investors are becoming more cautious in their views of China’s property market on the news of Kaisa’s developments. In Hong Kong, on March 18, 2015, a Hong Kong tribunal started a preliminary hearing involving the head of U.S. short-seller Citron Research over allegations that Citron published a “false and misleading” report about China’s fourth-biggest developer, Evergrande Real Estate Group Limited (“Evergrande”), in 2012. The hearing, being the Securities and Futures Commission’s first action against such short-selling firms, coincides with fresh signs that the heavily indebted Evergrande has become a target as international investors become increasingly worried about the pressure on Chinese developers’ cash flow in the wake of peer Kaisa’s offshore debt defaults, and the industry’s struggle to overcome a serious glut, particularly in third- and fourth-tier cities where Evergrande has a strong presence.22 Evergrande shares fell by 1.4% after U.S. equity research firm JL Warren Capital alleged that Evergrande had defaulted on loans to a major construction company in China. Evergrande denied these allegations. “This is a pure rumor,” it said. “Our co-operation with all contractors has been normal.”23
Prices for new homes in 66 of China’s major cities fell by 5.7% in February 2015, compared with February 2014, which became the worst decline on record.24 China’s property prices have fallen for a sixth consecutive month to the fastest rate since records began in 2011. Demand for housing in third- and fourth-tier cities also continues to fall, and the problem is further exacerbated by the limited purchasing power of these areas. The Central Government has made efforts to boost China’s ailing property market, such as by cutting the benchmark interest rate for five-year loans from onshore banks in November 2014 from 6.55% to 6.15% for the first time in more than two years, and then cutting it further to 5.90% in March 2015.25 Property regulations have also been eased, and incentives for homebuilders in select cities have been offered. So far, these measures have yet to stimulate the industry, which accounts for approximately 20% of China’s GDP.26 More buyers, fearing the continued devaluation, have been purchasing properties abroad in order to protect their investments. The record fall coincided with news that Chinese banks have extended Evergrande RMB 100 billion (equivalent to US$16 billion) in credit, as the real estate slump extends to one of the country’s biggest yet one of the most indebted property developers.27
Despite the recent slump, many within the industry remain hopeful that the pledge made by Premier Li Keqiang to support the economy and new government policies, such as reducing taxes and making mortgages easier to acquire, will boost China’s property market.28 “Although the overall market eased in the beginning of the year, as policies loosen further and new launches pick up in March, the property market is expected to see a recovery,” a consultant from China Real Estate Index System told Reuters.29
1 On January 7, 2015, Kaisa received a waiver from HSBC with respect to the breach of loan due to the resignation of Kaisa’s chairman, thus it was no longer required to repay the outstanding loan immediately, which gave it time to devise viable repayment proposals. Kaisa Group Holdings Ltd. notice dated January 12, 2015: http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0112/LTN20150112677.PDF
2 “Chinese Developer Appears to Default” by Wayne Ma and Fiona Law, Wall Street
Journal, January 8, 2015.
3 “Offshore” in this article refers to the jurisdiction outside of the PRC, and “onshore”, accordingly, refers to the jurisdiction of the PRC.
4 See footnote 1.
5 See footnote 1.
6 “PRC” in this article refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.
7 “China debt market is back as Kaisa troubles deemed company-specific” by Langi Chiang, South China Morning Post, February 20, 2015.
8 All exchange rates in this article are as of March 24, 2015.
9 Sunac China Holdings Limited, Ease Success Holdings Limited and Kaisa Group Holdings Ltd. Joint Announcement dated February 6, 2015: http://www.hkex.com.hk/eng/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/sehk/2015/0206/LTN20150206708.PDF; and “Kaisa shares close up 17.6 per cent following rescue by white knight” by Sandy Li, South China Morning Post, February 9, 2015.
10 Kaisa Group Holdings Ltd. announcement “Proposed Offshore Debt Restructuring” dated March 8, 2015: http://www.hkex.com.hk/eng/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/sehk/2015/0308/LTN20150308061.pdf 11 See footnote 10.
12 Kaisa Group Holdings Ltd. notice “Proposed Onshore Debt Restructuring and Resumption of Trading” dated March 2, 2015: http://www.hkex.com.hk/eng/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/sehk/2015/0302/LTN201503022035.pdf 13 Kaisa Group Holdings Ltd. announcement “Appointment of Independent Financial Adviser” dated March 17, 2015: http://www.hkex.com.hk/eng/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/sehk/2015/0317/LTN201503171005.pdf 14 See footnote 10.
15 “Kaisa’s offshore bondholders to lose out”, FinanceAsia, March 9, 2015.
16 See footnote 15.
17 See footnote 15.
18 Kaisa Group Holdings Ltd. announcement “Update on Proposed Offshore Debt Restructuring” dated March 22, 2015: http://www.hkex.com.hk/eng/csm/ShowNews.asp?mkt=hk&FileName=http://www.hkexnews.hk/listedco/listconews/sehk/2015/0322/LTN20150322029.pdf 19 “Foreign creditors reject Kaisa plan to restructure debt” by Langi Chiang and Agencies, South China Morning Post, March 20, 2015.
20 See footnote 19.
21 See footnote 19.
22 “Tribunal begins hearing case of short-seller who alleged developer Evergrande was insolvent” by Langi Chiang and Enoch Yiu, South China Morning Post, March 18, 2015.
23 See footnote 22.
24 “China’s real estate slump worsens” by Elizabeth Matsangou, World Finance, March 18, 2015.
25 Publications by the People’s Bank of China on cutting RMB benchmark loan and deposit interest rates as of July 6, 2012, November 22, 2014 and March 1, 2015.
26 See footnote 24.
27 “China February new home prices fall at fastest rate on record, add risk to growth target” by Clare Jim, Reuters, March 18, 2015.
28 See footnote 24.
29 See footnote 27.
