Sunac Said to Find Kaisa Unprofitable in Due Diligence Work
March 16, 2015
(Bloomberg) — Sunac China Holdings Ltd., which is buying Kaisa Group Holdings Ltd., has found during due diligence that the troubled developer probably had a loss last year, people familiar with the matter said. Sunac executives drew the conclusion based on studying Kaisa’s books after Sunac agreed to buy the Shenzhen-based developer, according to the people, who asked not to be named as Sunac executives are still going through the numbers. Kaisa said last month it would post a “substantial decline” in profit for 2014, without providing figures. Analysts are still forecasting a profit for the full year, with the average of six estimates compiled by Bloomberg at 3.1 billion yuan ($495 million).Sunac, based in Tianjin and seeking assets in southern China, bought 49.3 percent of Kaisa on Jan. 30 and later made a full takeover offer that’s conditional on a satisfactory debt restructuring. Kaisa narrowly avoided becoming the first Chinese real estate company to default on its U.S. currency debt after some of its projects in Shenzhen were blocked from being sold amid a corruption probe.
Sunac is insisting on debt relief for Kaisa because of the company’s bigger-than-expected financial woes, the people said.
While there might be some pushback from Kaisa’s offshore bondholders regarding the debt restructuring proposal, “I don’t think they are able to improve the terms significantly,” Yin Chin Cheong, a Singapore-based credit analyst at independent research firm CreditSights Inc., said by phone. “Kaisa has hardly any cash left and there is not much value for offshore creditors in a liquidation scenario if Sunac walks away.”
Kaisa dropped as much as 4.1 percent and was 2.7 percent lower at HK$1.43 as of 1:58 p.m. in Hong Kong. The shares reversed gains earlier on Monday. Sunac rose 0.6 percent to HK$6.52.
Its $800 million of notes due in 2018 fell 0.7 cents on the dollar to 55 cents in Hong Kong, as of 2:02 p.m. in Hong Kong, the first decline in a week, according to prices compiled by Bloomberg.
A Kaisa press official, who asked not to be named citing company policy, declined to comment. Phone calls to Sunac’s Tianjin-based media office went unanswered.
In a February filing, Kaisa disclosed a doubling of its outstanding debts in the six months ended Dec. 31.
A debt restructuring satisfactory to Sunac is a precondition to completing the deal, and Kaisa has said offshore creditors stand to recover just 2.4 percent of their money if the company is liquidated. Kaisa’s debt situation is “more complicated than expected,” Wu Jiesi, Sunac’s mergers and acquisitions and restructuring chief, said in a Feb. 21 interview.
Kaisa is seeking to trim obligations on some 17 billion yuan of offshore debt, with the coupon on its April 2016 notes proposed to be cut to 3.1 percent from 6.875 percent. Earlier this month it sought to cut the interest on its onshore debts to as little as 70 percent of the base rate set by the People’s Bank of China.
Onshore creditors have opposed the plan, which also seeks to extend the debts’ maturity by up to six years, while offshore bondholders have found the reduced returns too low, the people said.
Without the interest cuts, Kaisa’s losses would be so big in the next three years that they threaten to trigger default clauses on Sunac’s own bonds after the companies consolidate their balance sheets, the people said. Sunac Chairman Sun Hongbin has said he can hardly accept that, the people added.
Deloitte & Touche LLP, Sunac’s financial adviser, is also working on Kaisa’s profit forecasts, according to the people.
Kaisa’s weak results will “negatively” affect Sunac if the acquisition is completed, bringing down the acquirer’s revenue-to-debt ratio by at least five to 10 percentage points in the second half of this year, Moody’s Investors Service analysts led by Franco Leung wrote in a Feb. 12 report.
Standard & Poor’s on Feb. 16 put Sunac on credit watch with negative implications, saying the company’s cash flow and leverage could deteriorate over the next six to 12 months due to the acquisition.
Kaisa may also need to revise profit numbers for 2012 and 2013 much lower, according to the people, who declined to say what caused the discrepancies.
Sunac’s patience with the acquisition “won’t last more than one to two months,” Wu said on a conference call with international bondholders March 9. “If the situation just goes on, then at the end of the day, we have no other option than to withdraw,” Wu said.