Analysis: China property creditors face worsening restructuring terms as sector recovery hopes sour

Yuzhou group Co

11/10/2023 12:31

By Clare Jim, Xie Yu and Davide Barbuscia
       HONG KONG/NEW YORK, Oct 11 (Reuters) - As more Chinese
property developers move towards restructuring billions of
dollars of debt, their offshore creditors are expected to face
another setback - the prospects of revamp terms being tightened
due to a worsening outlook for the county's real estate sector.
    So far, developers accounting for 40% of Chinese home sales
have defaulted on their debt obligations since 2021, according
to JPMorgan. Those defaulted companies, mostly private, have
issued around $110 billion worth of high-yield offshore bonds. 
    Despite a raft of Beijing's supportive policies in recent
months, home sales are showing few signs of improvement.
Developers, financial advisers and bondholders said that could
make debt restructuring terms much worse than expected earlier.
    Sunac China  1918.HK  last week became the first property
developer to complete the debt revamp process after the sector
plunged into a debt and funding crisis in mid-2021, while
Country Garden  2007.HK , China's largest private property
developer, is expected to start those negotiations soon.
    A few developers, including Shimao Group  0813.HK  and CIFI
Holdings  0884.HK  have reduced offers to offshore creditors in
the past few weeks, citing a worsening environment, six sources
with knowledge of the matter said.
    The revised restructuring offers will see offshore creditors
taking haircuts of up to 70% to 80%, compared to zero in the
final plans the developers had proposed to them earlier, said
the sources.
    "Compared to 'Sunac time', the environment is very
different, hence the terms have to be very different," said a
senior executive of a developer in restructuring talks, citing
worsening home sales and a weaker yuan currency. 
    "Sunac may need to restructure again in a couple years time
if bad sales continue, so we don't use Sunac as a template. It's
not achievable."
    An adviser to developers also said home sales in June to
September were much worse than initially anticipated in the
negotiations, so many firms are lowering their terms and it
would take time for developers to convince creditors. 
    All the sources declined to be identified as they were not
authorised to speak to the media.
    CIFI declined to comment, while Shimao did not respond to
request comment.   
    
        
    DEFAULTING DEVELOPERS
     
  
        The property sector accounts for roughly a quarter of
the world's second-largest economy. However, it is in the throes
of a liquidity crisis that market participants fear could spread
throughout the financial sector at home and beyond.
        Country Garden on Tuesday became the latest Chinese
developer to warn about its inability to meet offshore debt
obligations. The company has nearly $11 billion of offshore
bonds.
    If it fails to make a coupon payment by Oct. 17, at the end
of the 30-day grace period, its entire offshore debt would be
deemed in default. That could trigger off one of the world's 
biggest debt restructuring exercises.
    Most of the defaulted developers have started negotiations
with creditors, but only three - Sunac, Fantasia  1777.HK  and
Zhongliang  2772.HK  - have gained enough creditor approval on
their restructuring proposals.  
    While the market believed Sunac's restructuring terms, the
latest to be approved, would serve as a template for the other
defaulted peers, those expectations are now getting a reality
check as the sector recovery hopes diminish. 
    "Sunac may have set a good example for the developers that
are still struggling to restructure. However, a turnaround (in
the property sector) may need more," said Chuanyi Zhou, Asia
corporate analyst at Columbia Threadneedle Investments, which
holds Sunac's bonds.
    "It is important to restore confidence in the sector."
    Sunac's move to sweeten the restructuring deal in June to
gain more creditor support is in stark contrast to the planned
moves by some peers. 
    Yuzhou Group  1628.HK  announced in August that one of the
three options it offered would have a haircut of around 70%,
becoming one of the first developers to announce a reduction in
principal, though there is also one option without any haircut.
         
    LIQUIDATION RISK
    Bond prices of Country Garden, CIFI and Shimao have been
generally on the decline this year, and are mostly bid below 10
cents against the dollar, suggesting a below 10% recovery rate
for bondholders.  
    Developers have told Reuters earlier this year they could
not include haircuts to reduce the debt principal as they wanted
to because of strong opposition from creditors, especially
Chinese banks.
    "No one has put these haircut plans to work so far," said a 
senior executive of another developer. "You can offer whatever,
but if creditors don't approve your plan, you may end up being
wound up."
    For creditors, however, a long-winding liquidation process
may not be a good option -- developer Kaisa Group  1638.HK  has
said creditors would get less than 5% of their money back if it
is forced into liquidation.
    "I don't think anyone wants to go to liquidation," said
Edward Al-Hussainy, head of emerging market fixed income
Research at Columbia Threadneedle. "I don't think anybody is
coming to the table with that as the ultimate goal."
    Chinese policymakers rolled out a range of support measures
in late August and early September to revive the property
sector. But developers said they were not enough to turn around
the ailing sector any time soon.
    China's average daily home sales based on floor area during
last week's Golden Week holiday were down 17% from a year ago,
according to China Index Academy.
    "The fact that the government isn't stepping in actively,
and that financial stability issues aren't at the forefront of
their thinking, it means they can impart a fair amount of pain
on bondholders," said Al-Hussainy.   

 (Reporting by Clare Jim and Xie Yu in Hong Kong, Davide
Barbuscia in New York; Editing by Sumeet Chatterjee and Kim
Coghill)
 ((clare.jim@thomsonreuters.com;))