Kaisa Bondholders Dream of White Knight as Pay Deadline Passes

The best hope for Kaisa Group Holdings Ltd.’s offshore debt holders is a buyer swooping on the Chinese developer and repaying them, according to CreditSights Inc.

The company hasn’t yet honored an interest payment due Jan. 8, according to four bondholders, after failing to repay a bank loan on Dec. 31, a deadline triggered by the resignation of its chairman Kwok Ying Shing. At least three financial institutions have applied to a court in Shenzhen to ringfence Kaisa properties, local media reported Jan. 7, without citing anyone.

A default would be the first by a homebuilder in China and Hong Kong, which together issued the most junk bonds in Asia the past two years. Real estate securities now comprise about 20 percent of outstanding Asian corporate notes, according to Nikko Asset Management Co.

“A white knight is the best case scenario now for bondholders,” Singapore-based Yinchin Cheong, an analyst with independent research firm CreditSights said by phone today. “Employees, local banks and even equity holders onshore are likely to get paid before offshore investors.”

Kaisa had assets valued at 105.6 billion yuan ($17 billion) as of June 30, with about a fifth of them guaranteeing bank loans, according to its half-year results.

Once a Chinese company enters bankruptcy, the court liquidates its assets and pays onshore stake holders, including employees and stock owners, before it starts paying offshore investors, Hong Kong-based Charles Chang, a credit strategist at Credit Suisse, wrote in a Jan. 8 report.

Last Place

Depressed prices in any fire sales, along with the fact that offshore investors are last in line, mean uncertain prospects for repayment, according to Franco Leung, a senior analyst at Moody’s Investors Service.

“Assessing recovery is quite difficult because the most reliable information are the financial statements,” he said. “But in the balance sheet the assets are at book value so we wouldn’t know the market value for them.”

Kaisa bonds climbed today as noteholders wait to discover if it paid the coupon on $500 million of 10.25 percent 2020 debentures on time. If the developer fails to do so, it will have a 30-day grace period to resolve the situation, according to a Jan. 7 CreditSights report.

“The market is quite divided at the moment,” said Alan Kao, a credit strategist in Hong Kong at Haitong International Securities Co. “Some people think the recovery is zero, some think a restructuring is highly likely, resulting in a recovery value higher than indicated by the market.”

Kaisa wasn’t immediately able to comment, spokesman Lin Yikang said in an e-mailed response to Bloomberg News questions today. The company also couldn’t confirm yesterday whether it planned to meet its bond coupon payment deadline.

If the company does go into a restructuring, “the process will be quite different from what we see in the West,” Moody’s Leung said. “A better scenario would be a white knight.”