China property debt crisis puts founders on the spot

China property debt crisis puts founders on the spot

China’s property magnates face a choice between giving up control or risking insolvency as the industry’s liquidity crisis deepens. It’s a marked contrast to previous crunches when founder-chairs mostly came up with ways to cling to their controlling stakes.

Developer Agile (3383.HK) highlighted the issue last month when it sold bonds that on maturity turn into shares in its property-management unit, A-Living Smarty City Services (3319.HK). Now bondholders are trying to push Kaisa Group (1638.HK), one of the biggest offshore borrowers, to consider a similar deal as part of a broader package of funding suggestions.

There are plenty of potential candidates to tap into the type of convertible debt Agile used, known as exchangeable bonds. In the past four years, some 30 developers listed minority stakes in their managers on the Hong Kong bourse to capitalise on the appeal of asset-light businesses with long-term contracts for taking out the trash and mowing the lawns.

Agile’s deal allows it to borrow $310 million for five years at 7%, far lower than the 20% implied by where its equivalent unsecured debt trades. When the bonds fall due, investors will be repaid with 6.2% per cent of A-Living’s stock, reducing Agile’s stake to 48%.

The structure won’t work for everyone. Some groups may not have enough unencumbered equity after pledging chunks as loan collateral, while others structured their managers as sister firms, not subsidiaries. Investors also need to believe their bet will survive the cash crunch.

Kaisa’s Prosperity unit is small with a market value of $258 million. Even together with holdings in a construction-equipment business, a newspaper group and an electronic components maker, boss Kwok Ying-Shing wouldn’t come close to covering the $400 million bond due for repayment on Tuesday. Bondholders have formally offered forbearance if Kwok will discuss their other funding suggestions, including exchangeable.

That means such deals are only to be part of a broader package. Founders are already taking the plunge in other ways that reduce their hold: Last month $8 billion Sunac China (1918.HK) raised $950 million by selling new shares and a stake in Sunac Services (1516.HK). Founder Sun Hongbin has also loaned the company $450 million interest-free.

Magnates’ newfound flexibility on ownership underlines how the current crisis has put them all on the spot.

Source: Reuters

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