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

HONG KONG/NEW YORK: 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 country’s real estate sector.

So far, developers accounting for 40 per cent of Chinese home sales have defaulted on their debt obligations since 2021, according to JPMorgan. Those defaulted companies, mostly private, have issued around US$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 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, China’s largest private property developer, is expected to start those negotiations soon.

A few developers, including Shimao Group and CIFI Holdings, 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 per cent to 80 per cent, 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.”

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An adviser to developers also said home sales from 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 the request for 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 (Oct 10) became the latest Chinese developer to warn about its inability to meet offshore debt obligations. The company has nearly US$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 one of the world’s biggest debt restructuring exercises.

Most of the defaulted developers have started negotiations with creditors, but only a few, including Sunac, Fantasia, Zhongliang and Aoyuan, have gained enough creditor approval on their restructuring proposals.

While the market believed Sunac’s restructuring terms would serve as a template for the other defaulted peers, those expectations are now getting a reality check as the sector’s 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.

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“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 announced in August that one of the three options it offered would have a haircut of around 70 per cent, 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 per cent recovery rate for bondholders.

Developers 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 has said creditors would get less than 5 per cent 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 per cent 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.

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