(Bloomberg)—Global creditors are bracing for a long-drawn battle to recover money from China’s troubled developers, as a property meltdown continues to roil the nation’s $735 billion offshore bond market for a third straight year.
Frustrated dollar bondholders have been trying all they can to make defaulters pay, but their efforts have largely been stymied by lengthy debt restructuring processes and litigation. Below their onshore peers in the pecking order, a few have appealed for intervention by regulators. Many have even resorted to winding-up petitions, a risky legal action that could backfire by triggering fire sales at distressed prices.
Though a flurry of debt revamp proposals shows incremental progress lately, a plan unveiled last week by China Evergrande Group has raised concerns that investors may have to wait for years to get their money back. Under one of the options, the biggest Chinese builder to default offered to swap old notes with new ones with maturities of as long as 12 years. Nomura Holdings Inc. said in a report that the plan sets a “low bar,” though it may help expedite others in the pipeline.
A similar proposal released Tuesday by Sunac China Holdings Ltd., once among the country’s five biggest developers, aims to replace dollar notes with new debt maturing in two to nine years. Offshore-bond holders’ recovery looks “precarious” under the plan, said CreditSights Inc. senior analyst Zerlina Zeng.
The creditors’ struggle to claw back money not only highlights challenges faced by overseas investors in the world’s second-biggest credit market, but also shows Beijing’s inability to end the crisis that felled some of the biggest developers including Evergrande. Despite a recent slew of government measures to support the sector, persisting liquidity squeeze means elevated delinquencies in the near term, according to Goldman Sachs Group Inc.
Corporate delinquencies on offshore notes totaled a record $46.5 billion in China last year, according to data compiled by Bloomberg. Largely shut out of credit markets, builders defaulted on more than 140 bonds in 2022 and missed payments on a combined $50 billion in domestic and global debt based on issuance amount.
“We haven’t seen a cluster of this many defaulted cases in China in many years,” said Charles Chang, senior director and Greater China country lead at S&P Global Ratings in Hong Kong. “It’s difficult to use past benchmarks. It’s a precedent-setting moment.”
China’s high-yield dollar bonds, dominated by developers’ debt, are on track for their biggest monthly loss since October, dragged down in part by dimming prospects for rapid recovery. Most Evergrande notes have stayed under 10 cents even after the revamp plan, suggesting investors see little upside.
While the battle to recoup money is not unique to creditors investing in China, the sector-wide restructuring, huge debt load as well as cross-border legal complexity all add to the long road to recovery.
Evergrande kept offshore debt holders on tenterhooks for months before presenting its plan. One option includes interest payments on fresh securities in kind for the initial 30 months, meaning with more debt.
Some experts say the property giant’s plan could offer a road map for other embattled developers such as Kaisa Group Holdings Ltd. and Shimao Group Holdings Ltd. Meanwhile, Logan Group Co. is looking at replacing bonds with new debt maturing in seven years, Bloomberg News reported this month.
“There remain obstacles in execution due to the size and complexity of the capital structures of most of defaulted developers,” said Jenny Zeng, chief investment officer for Asia fixed income at Allianz Global Investors. “The cross-border feature also adds another layer of execution challenges.”
Unlike offshore creditors, their onshore peers have largely been lucky. Distressed developers have tried to meet their domestic obligations, offering extensions with shorter waiting times. Evergrande, for instance, has paid coupon to local holders for months since its offshore default in late 2021.
Some overseas creditors are running out of patience.
Earlier this month, the legal adviser to a group of holders of Jinke Properties Group Co.’s sole dollar bond shot off a letter to authorities, seeking their help “to supervise repayment of offshore notes” after failing to a get a response from the company. The missive was addressed to the Shenzhen Stock Exchange, where Jinke is listed, the financial authority and the securities regulator’s local branch in the southwestern city of Chongqing, where the developer is based.
Then there are some resorting to several other legal tactics. The most popular among them is the winding-up petition, which is accessible to big and small creditors alike. It can be filed against a company in a Hong Kong court when a creditor is owed at least HKD10,000 ($1,274).
Such lawsuits, which started gaining momentum late last year, are usually wielded as leverage to force borrowers to the negotiating table. The major risk is liquidation, which may not be in the best interest of debt holders. A court in Hong Kong issued an order in October 2022 to wind up a unit of Yango Group Co., the first such instance against a major builder.
Hong Kong has become a key legal battlefield for global creditors seeking recovery of their money, as the city previously served as a gateway for Chinese issuers to access the offshore market. Mainland developers facing winding-up petitions in Hong Kong include Evergrande, and units of Logan and Fantasia Holdings Group Co.
Stuck in Courts
Winding-up petitions initially did help a minuscule number of creditors to reach a compromise — making them popular — but a vast majority of them continue to languish in courts. It was such a lawsuit that pushed Evergrande to negotiate with some creditors.
But lately, as one plaintiff found out, the favored legal strategy is creating new complications and thwarting prospects of an early settlement.
Yeung Man, who filed a winding-up petition against Jiayuan International Group Ltd., was in talks with the debtor for a deal, but other creditors tagged along and demanded to be part of the negotiations. The judge told the company to work out a debt revamp plan, effectively scuppering chances of a quick deal for Yeung. Jiayuan declined to comment, while multiple calls to the legal representatives of Yeung remained unanswered.
China’s authorities have unveiled a bevy of measures to help ease the real estate sector’s unprecedented liquidity squeeze, including lower mortgage rates on purchases of first homes and state guarantees to some builders’ new yuan notes.
The steps did spark a record rally in developer dollar bonds November through January, but that has fizzled largely due to the protracted housing slump and the cash crunch.
Goldman predicts the default rate for Chinese high-yield property firms will only ease to 28% this year from above 40% in 2022 on expectations that liquidity support may be “disproportionately directed towards better-quality developers.”
“The first-ever real credit default cycle China is now experiencing should also provide better visibility on restructuring processes and recovery value,” said Allianz’s Zeng, adding that it “will eventually pave the way to a much healthier path forward” for the nation’s property sector.
--With assistance from Yuling Yang.
© 2023 Bloomberg L.P.