Anxious Kaisa investors throw good money after bad

Men work at the construction site of the Beijing Xishan Palace apartment complex developed by Kaisa Group Holdings Ltd in Beijing, China, November 5, 2021. REUTERS/Thomas Peter

HONG KONG, Sept 21 (Reuters Breakingviews) – Foreign bondholders in Chinese property developer Kaisa (1638.HK), which is starting to default on $12 billion of offshore credit, are offering up to $2 billion to take over stalled housing projects plus restructure debt. A similar proposal failed last year, but as its woes worsen, Kaisa may reconsider. Pricing is the trick.

As with most holders of dollar bonds issued by Chinese developers, Kaisa’s investors are in a tough position. The Shenzhen-based company has not published its 2021 annual report, so there’s little insight on its current financial condition. Its shares have been halted since April, and its bonds are trading at as low as 10 cents per dollar. Their backs against the wall, the group is proposing to take a 20% haircut on the dollar notes plus inject equity capital. In addition, they want to buy bad loans tied to its unfinished housing developments at a discount between 20% and 25%, per Reuters read more , then take over the collateral and complete the projects.

This is the second such attempt. After Kaisa defaulted on a $400 million note in December, bondholders offered read more to buy up to $1 billion of its bad loans, but Kaisa’s banks shrugged the offer off. After all, Kaisa was the first Chinese real estate company to default on dollar debt during a mini real estate crash in 2015, yet Chairman Kwok Ying-shing managed to turn the company around while clinging onto control.

But this crisis looks more serious than 2015. Credit ratings agency Moody’s estimates property sales could contract another 20% by next June. Kaisa’s sales slumped 80% in the first eight months this year, per Chinese consultancy CRIC.

Local governments are under increasing pressure from Beijing to ensure private developers’ stalled housing projects pre-sold to buyers are delivered to avoid social unrest. read more But their budgets are constrained by dwindling revenue from land sales, which fell 32% year-on-year during the first seven months of 2022. State-owned asset managers and lenders are constrained by capital adequacy and leverage requirements. That should make all of them more open to the group’s pitch this time around.

The debate will be over the discount. Many of the distressed projects appear to be in attractive locations, making them easier to sell once completed, but such projects are often secretly pledged as collateral multiple times and loaded with hidden debts. This deal may get further than the last one, but that doesn’t mean it will close.

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CONTEXT NEWS

An offshore bondholders’ group of Shenzhen-based Chinese property developer Kaisa is offering up to $2 billion to buy some non-performing loans from Kaisa’s lenders, tied to unfinished housing projects, at a 20%-25% discount, plus provide the financing needed to complete the projects, Reuters reported on Sept. 19 citing unnamed sources.

Editing by Pete Sweeney and Thomas Shum

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