China’s real estate debt crisis puts founders in embarrassment


HONG KONG (Reuters Breakingviews) – Chinese property tycoons must choose between relinquishing control or risking insolvency as the industry’s liquidity crunch deepens. This is in stark contrast to previous crises, when founding presidents for the most part found ways to hang on to their controlling stakes.

The Agile developer highlighted the problem last month when he sold bonds that, when due, turn into shares of his property management unit, A-Living Smarty City Services. Now bondholders are trying to get Kaisa Group, one of the biggest offshore borrowers, to consider a similar deal as part of a larger package of financing suggestions.

There are many potential candidates to tap into the type of convertible debt used by Agile, known as exchangeable bonds. Over the past four years, around 30 developers have listed minority stakes in their executives on the Hong Kong Stock Exchange to take advantage of the attractiveness of low-value companies with long-term contracts for garbage collection and mowing lawns.

Agile’s deal allows it to borrow $ 310 million over five years at a rate of 7%, well below the 20% involved in trading its equivalent unsecured debt. When the bonds mature, investors will be reimbursed with 6.2% per cent of the shares of A-Living, reducing Agile’s stake to 48%.

The structure will not work for everyone. Some groups may not have enough unencumbered equity after pledging pieces as loan collateral, while others have structured their managers as sister companies, not subsidiaries. Investors must also believe that their bet will survive the liquidity crisis.

Kaisa’s Prosperity unit is small with a market value of $ 258 million. Even with stakes in a construction equipment company, a news group and an electronics component maker, boss Kwok Ying-shing wouldn’t come close to covering the $ 400 million obligation to be repaid on Tuesday. The bondholders have officially offered forbearance if Kwok will discuss their other funding suggestions, including exchangeable ones.

This means that these agreements should only be part of a larger whole. The founders are already taking the plunge in other ways that are reducing their grip: Last month, $ 8 billion Sunac China raised $ 950 million by selling new shares and a stake in Sunac Services. Founder Sun Hongbin also loaned the company $ 450 million interest-free.

The new ownership flexibility of the tycoons underscores how much the current crisis has put them all in the spotlight.

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– Investors in the Kaisa Group are the latest to suggest that the struggling developer consider some type of convertible bond to help fund it during the liquidity crunch plaguing China’s vast real estate sector.

– A group of bondholders have proposed forbearance on a $ 400 million bond that is slated for repayment on Dec. 7 if the company discusses its suggestions to provide up to $ 2 billion in new funding to the company . One of them involves the purchase of bonds which, upon maturity, would be exchanged for shares of Kaisa Prosperity, the developer’s property management unit, as well as its other companies.

– On November 18, rival Agile Group sold $ 310 million worth of five-year bonds which, at maturity, will be exchanged for shares of A-Living Smarty City Services, its property management business, at the price of this amount.

– The two units were split in 2018. Agile owns 54% of A-Living, while Kaisa owns 67% of its subsidiary.

(Edited by Antony Currie and Katrina Hamlin)

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