Troubled Chinese developer Kaisa in hidden off-balance sheet debt accounting scandal; told foreign bond investors that it faces a $10.4bn debt load-more than double the amount it previously disclosed

http://www.wsj.com/articles/kaisa-appeals-to-offshore-creditors-to-contact-firms-financial-adviser-1424067331

http://www.scmp.com/print/business/companies/article/1714531/china-developer-kaisa-halts-share-trading-pending-announcement

Kaisa Discloses Much Higher Debt Burden

Troubled Chinese Developer Pushes Foreign Bond Investors to Cut a Deal

ESTHER FUNG

Updated Feb. 16, 2015 7:44 a.m. ET

SHANGHAI—Troubled Chinese property developer Kaisa Group Holdings Ltd. told foreign bond investors Monday that it faces a US$10.4 billion debt load—more than double the amount it previously disclosed—and pressed them to cut a deal to avert a blow to its operations.

The disclosure is likely to increase investor fears over Chinese property developers and their potential exposure to nontraditional debt that may be held off their balance sheets. It also renews questions about Kaisa’s fate just a week after it struck a 4.55 billion Hong Kong-dollar (US$587 million) deal with another property developer that appeared to address many of its problems.Kaisa said in a filing with the Hong Kong Stock Exchange that its total debt amounted to 65 billion yuan as of Dec. 31, including 48 billion yuan in mainland China. In addition, Kaisa said it expects that it needs to repay as much as 35.5 billion yuan before the end of this year. It also said it expects a “substantial decline” in 2014 net profit, without elaborating.

The Monday disclosure marks a sharp jump from the debt load it disclosed in September. It said in a filing then that it had 6.01 billion yuan in current borrowings and another 23.77 billion yuan in longer-term borrowings as of June 30. The company didn’t explain the difference between the figures, and a Kaisa spokesman declined to comment further.

Kaisa said the figures should prompt its bondholders to come to the table and reach a quick settlement.

“In light of the financial position at the group and its future obligations, it is anticipated that the restructuring will need to be conducted on an expedited basis,” the company said.

HSBC analyst Keith Chan said in a note that he was “negatively surprised by the ballooned interest-bearing debt obligations” and attributed it to borrowings from nontraditional Chinese lenders. China’s informal—or shadow—banking sector has been a major lender to Chinese real-estate developers, particularly the investment vehicles known as trusts.

“As to the implication to the rest of the China property sector, we see most of the China property high-yield bond issuers recognizing trust financing exposures as on-balance sheet debt obligations,” Mr. Chan said.

Kaisa’s bond due in 2017 traded at 67.58 cents on the dollar, down from 71.58 cents Friday. It halted its Hong Kong-traded shares Monday pending a potential debt deal.

China’s shadow-banking sector has been a focus of worry among economists—particularly its role with the country’s vast but slumping property market. China’s economic growth is slowing—last year’s 7.4% rise over a year ago was slowest in nearly a quarter century—and the country is still saddled with debt accumulated during a lending-and-spending spree following the 2008 global financial crisis.

The property market has been under particular scrutiny. It is suffering from oversupply apartments and homes in many Chinese cities. Over the years, it has also increasinglyrelied on shadow lenders like trusts as banks have pared their exposure to the sector over bad-debt worries.

Kaisa was scheduled to meet with its onshore lenders about a proposal to restructure its debt Monday in Shenzhen. An email seeking comment sent to Brandon Gale, a representative at Houlihan Lokey assigned to engage Kaisa’s offshore bondholders, went unanswered.

Any settlement is likely to hit holders of Kaisa’s foreign, U.S. dollar-denominated debt, analysts said, given the difficulty of foreign investors to win decisions in Chinese courts.

“They might have to take the biggest haircut,” said Graham Lim, a partner at Jones Day, noting that some with a stronger risk appetite might be holding out for better terms.

“For certain hedge funds and distressed debt players, Kaisa’s coded message to them could be, ‘Don’t be too stubborn,’” said Mr. Lim.

Rival developer Sunac China Holdings Ltd. this year agreed to purchase a 49.25% stake in Kaisa for $4.55 billion Hong Kong dollars (US$587 million) conditioned upon the restructuring or refinancing of its existing debt. Sunac later proposed buying the rest of Kaisa’s shares at HK$1.80 apiece.

“Sunac has a keen interest in making sure that the acquisition goes through, and it should negotiate with both onshore and offshore creditors. It’s hard to say that it would discriminate against offshore bondholders, and it’s possible that all creditors, including those onshore, will have to compromise and to take losses,” said Ying Wang, an analyst at Fitch Ratings.

Kaisa first ran into trouble late last year after authorities in Shenzhen prevented apartments in some of its projects from being sold or transferred, without revealing the reason for the freeze. Senior executives, including its founder and chairman Kwok Ying Shing, later resigned. The cash-strapped firm added early this month that it has received demands for repayment from its creditors totaling 28 billion yuan, and that several of its bank accounts with a total credit balance of 550 million yuan remain frozen.

Developer Kaisa eyes urgent restructuring of debts that now top HK$78 billion

Monday, 16 February, 2015, 10:30am

Reuters and Don Weinland

Troubled Chinese developer Kaisa Group disclosed on Monday that its debts now total more than US$10 billion (HK$78 billion) and that it needs to urgently restructure its borrowings in order for a proposed rescue deal by Sunac China Holdings to proceed.

Kaisa said in a stock exchange notice that its aggregate interest-bearing debt stood at 65 billion yuan (HK$81 billion) at the end of 2014, which includes trade creditors. As much as 35.5 billion yuan of this debt could be due before the end of 2015.

The company had previously reported that on June 30, 2014 its borrowings only amounted to 29.8 billion yuan, though this number would not have included trade credit.

Kaisa’s problems rattled Asian corporate debt markets at the start of this year after it failed to make a timely repayment on a HK$400 million loan from HSBC and was late on a US$26 million bond coupon payment.

Bondholders had hoped Sunac’s proposed acquisition of a 49.25 percent stake in Kaisa would help bring its debt situation under control, but Monday’s disclosure indicates their borrowings could be higher than they had feared.

Kaisa bonds due 2020 have dropped to 60 cents on the dollar, 15 points off the highs they struck after the news of Sunac’s proposed stake purchase. Trading in its shares was suspended earlier on Monday.

Kaisa’s liquidity will be tested once again next month as it has coupon payments due on its bonds with 2017 and 2018 maturities.

The company also warned on Monday that it will experience a substantial decline in its net profit for 2014 and that its cash flow could be hit by an ongoing government block on sales at some of its developments in Shenzhen.

The company’s problems escalated late last year after it was hit by the sales block and the subsequent departure of a string of senior executives, including founder chairman Kwok Ying Shing.

Kwok’s exit triggered the mandatory prepayment provision in a HK$400 million HSBC loan, which it failed to repay, creating panic among investors after the company said it could default on other obligations.

It missed a January 8 deadline for paying a coupon on its bonds due 2020 but subsequently paid up within the 30-day grace period.

Kaisa said it would hold a meeting with its onshore creditors later on Monday, and said it hoped to engage offshore creditors on a restructuring proposal as soon as is practicable.

It added it hoped to reach a debt restructuring agreement by the end of March, and complete the process in April.

Kaisa halted share trading on Monday ahead of the new disclosures.

Kaisa said in a stock exchange filing last week that it had begun assessing various options with regard to its onshore and offshore debt obligations and planned to start talks with creditors as soon as possible with a view to completing them by the end of April.

It warned that lenders and bondholders “should not expect payments of principal and interest according to existing terms”.

The company has been in the headlines for several months over concerns its chairman was under investigation by central government authorities, allegations the company has denied. The firm’s chief executive, Jin Zhigang quit, his post in early February, following the exit of four other senior executives in the company in December.

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