Kaisa sells Hong Kong property stake at steep discount and seeks debt exchange to avoid default

·5 min read

Kaisa Group Holdings has agreed to sell its stake in a development at the old Kai Tak airport site at a steep discount and is asking bondholders to exchange another US$400 million of notes set to mature next month, as the heavily indebted Chinese developer tries to stave off default.

The Shenzhen-based developer’s shares jumped nearly 14 per cent to close at HK$1.15 in Hong Kong on Thursday following the announcements, their biggest one-day percentage surge in more than two years. It was the first time its shares had traded in three weeks after having lost almost 70 per cent – or HK$9 billion (US$1.2 billion) – in market value over the past three months as its cash crunch worsened.

Kaisa, which was downgraded by Fitch last week to “C” from “CCC-”, also officially confirmed it had missed about US$88 million in interest payments on its offshore debt due on November 11 and November 12. Both junk-rated bonds have a 30-day grace period, after which the company will face a default on the aggregate US$1.5 billion in notes.

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“The company is in the process of assessing the repayment obligations of the group with the objective of formulating an overall plan taking into account the interests of all its stakeholders, to address the liquidity issue,” it said in a stock exchange filing late on Wednesday.

The group has US$11.4 billion of outstanding bonds coming due in 2026, and US$200 million of perpetual notes, according to Bloomberg data. Some of them are trading well below their face value at price levels typically associated with defaulted securities.

Highly indebted Chinese developers, from China Evergrande Group to Kaisa, have been trying to buy time with partial repayments and debt restructurings in recent months as they have faced a liquidity crunch after Beijing instituted new rules design to stem speculative bubbles in the residential property sector.

The “three red lines” measures have made it hard for overleveraged developers to take out bank loans, cutting off an important source of funding and causing some cash-strapped developers to default on their dollar-denominated debt.

Kaisa founder and chairman Kwok Ying-shing has put 18 property projects in Shenzhen worth 81.8 billion yuan (US$12.8 billion) on the auction block in recent weeks to raise cash.

SCMP Graphics
SCMP Graphics

In the Kai Tak sale, a venture backed by New World Development and Far East Consortium International will pay HK$1.9 billion and assume about HK$6 billion in loans for the site on the runway of Hong Kong’s former airport, according to a stock exchange filing.

“It is a very reasonable price for us,” said Far East Consortium International managing director Chris Hoong Cheong Thard.

The audited value of the property, indirectly owned by Kaisa and the mainland Chinese businessman Chen Zhuangrong, was HK$9.8 billion as of June 30. It was acquired last year from Hong Kong developer Goldin Financial Holdings, which has faced its own financial troubles.

“We will discuss the loan restructuring with the vendor’s debtors later,” Hoong said.

Kwok Ying-shing, chairman and chief executive officer of Kaisa Group Holdings, during the company’s 2017 financial results press conference in Hong Kong. Photo: Jonathan Wong.
Kwok Ying-shing, chairman and chief executive officer of Kaisa Group Holdings, during the company’s 2017 financial results press conference in Hong Kong. Photo: Jonathan Wong.

The 9,708-square metre (104,496 square feet) property is designated for private residential purposes. It will have a maximum gross floor area of 53,394 square metres. The price translates to about HK$13,000 per square foot, compared with about HK$14,000 per square foot at a neighbouring site in Kai Tak.

In addition to its property sales, Kaisa also reached an agreement on Monday with investors who bought about 1.1 billion yuan (US$172 million) of its wealth management products to pay a 10 per cent instalment when they mature and then 10 per cent every three months. It is still negotiating with investors who bought just under 400 million yuan of the wealth products.

On Wednesday, Kaisa said it would seek to exchange 95 per cent of the principal amount it owes on US$400 million in notes that are set to mature on December 7. There is no grace period at maturity.

The new notes will be due on June 6, 2023, and will pay a 6.5 per cent interest rate – the same rate it is paying on the current notes.

If investors do not agree to the exchange, Kaisa said it may not be able to repay the offshore notes at maturity and it may consider an “alternative debt restructuring exercise”.

Additional interest payments on other bonds will come due in December and January, while its nearest maturity bonds in 2022 include a US$550 million note in April and US$1.15 billion note in June.

The current debt crisis is a repeat of its financial troubles in 2015, when it became the first Chinese developer to default on US dollar-denominated bonds, destabilising the Asian high-yield market along the way.

Mainland Chinese companies, mostly developers, are still the biggest issuers of junk bonds in the region, accounting for 57 per cent of the US$209 billion market, according to IHS Markit.

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