Analysis: Debt restructuring no panacea for Chinese developers as challenges loom

KWG group

18/05/2023 09:02

By Clare Jim and Xie Yu
       HONG KONG, May 18 (Reuters) - A shrinking land bank and
sluggish property demand are likely to hamper the plans of a
growing number of private Chinese developers who have defaulted
on their debt and are restructuring it to win breathing room to
revive their fortunes.
    Those hurdles could hinder the drastic improvements in 
sales and liquidity the realtors need to resuscitate their
business and service debt in the long-term, according to five
developers and restructuring advisers.
    That could necessitate a second round of debt restructuring
eventually at some of the developers, they said.
    "Most of the restructuring deals we see for now only buy
time for developers. But problems might come back if the
developers can't generate cashflow as they expected," said
Esther Liu, analyst with S&P Global Ratings.
    Private developers have been in turmoil since mid-2021
following a crackdown on debt levels by Beijing that ensnared
China Evergrande Group  3333.HK , then the No.2 developer, and
eventually spread in the sector. Property companies were among
the biggest high-yield issuers in Asia.
    The crisis drained developers' liquidity, resulting in many
defaults. Evergrande and Sunac China  1918.HK  are the most
prominent among the handful of companies that have announced
their offshore debt restructuring terms so far.
    More are expected to do so in the coming months, which will
also include terms such as longer maturity extensions, lower
coupons, and converting some debt into equity, developers and
advisers said.
    The objective is that by freeing up the developers from
repayment obligations in the first few years, they are provided
enough breathing space to get back on their feet.
    The revival, however, seems to be uncertain as both the
broader economy and the property sector are stumbling. Property
investment and sales fell sharply in April, and the pace of home
price gains slowed during the month.
    Moreover, the private developers are staring at lower
potential future revenues as they are unable to build on their
land banks due to their precarious financial positions.
    In 2022, 84% of land in 22 major Chinese cities was won by
state-owned or state-backed developers in auctions, according to
private researcher CREIS. In the first four months this year,
they accounted for 14 of the top 20 land buyers.
    "The industry will need another restructuring," said a
senior executive of a mid-sized developer that has defaulted on
its offshore debt, citing a possible paucity of resources after
two to three years of completing existing projects and repaying
onshore banks as reasons.  
    "To become a normal operation again developers will need to
buy land, but if there are any proceeds from sales, do you think
our creditors would want us to pay them back first or use it to
buy land?," the executive added, declining to be named due to
the sensitivity of the issue.
 
   
     LEVERAGE REMAINS HIGH 
    Developers said contributing to a possible rise in second
restructurings is the likelihood that their leverage will remain
high even after this round of restructuring, because of strong
opposition from creditors, especially Chinese banks, to take
"haircuts" to reduce the debt principal. 
    Creditors prefer instead to swap part of the debt into
equity in such deals. 
    However, this means the company's debt will not be lowered
to a meaningful level to run a healthy future business because a
firm cannot convert too much debt into equity to a level that
alters control of the company.
    A higher equity base will also raise the risk of developers
falling into negative equity.
    "If property price fell, it will negatively impact the
developers' book value of equity, and it might need to do
restructuring again," said John Lam, UBS head of China property
research.
    Some companies have recently entered into debt
restructurings after they had extended repayment maturities last
year via bond exchange deals, dashing hopes the raft of
supportive policies rolled out in November could help turn
around the market.
    The latest such case is KWG Group  1813.HK , which was
deemed to be of better quality. 
    Despite all the uncertainties and concerns, developers and
creditors said they would like to close the restructuring
chapter soon and move on.
    "Only by completing a restructuring, we can talk to clients
and banks and pretend things are back to normal," said a
developer.

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China's state-owned developers increasing dominance    https://tmsnrt.rs/3IhOxrD
China's property sector    https://tmsnrt.rs/45l5Im6
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 (Reporting by Clare Jim and Xie Yu; Graphics by Kripa Jayaram;
Editing by Sumeet Chatterjee and Muralikumar Anantharaman)
 ((clare.jim@thomsonreuters.com;))