Kaisa Dollar Debt Jumps as Company’s Future Hangs in Balance

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Kaisa Group Holdings Ltd.’s dollar bonds surged today as debate over the troubled developer’s future escalates.

The company’s $500 million of 10.25 percent 2020 notes jumped 18.6 cents to 80.1 cents on the dollar, the highest since Dec. 19, as of 2:55 p.m. in Hong Kong after sinking to 29.9 cents earlier this month. The debentures’ 30-day historical volatility soared to 240 percent, the most on record. The government in the southern Chinese city of Shenzhen, Kaisa’s home town, has backed Sunac China Holdings Ltd. buying a stake, a person with knowledge of the matter said.

Just what Kaisa’s future holds will go a long way to determining how much international investors recoup after lending the equivalent of $2.5 billion to the real estate company since late 2010. Recoveries achieved by bondholders of other Chinese distressed and stressed companies have varied widely over the years, ranging from 5 percent or less for Suntech Power Holdings Co. and Celestial Nutrifoods Ltd. to about 75 percent of par, in the case of China Nickel Resources Holdings Co.

“The bonds have been rallying today as news around Sunac buying a stake in Kaisa started,” said Diwakar Vijayvergia, a Singapore-based trading desk analyst at Royal Bank of Scotland Group Plc in Singapore. “However we still think it’s early days and expect more volatility. We’re yet to see how the situation unravels for bondholders.”

Heavily Traded

Kaisa’s $250 million of 12.875 percent 2017 bonds, which are trading up 17.8 cents at 86.5 cents on the dollar, are the eighth most-traded in the past week in Asia by number of transactions, according to data compiled by Bloomberg. The notes were sold to investors at par, or 100 cents on the dollar, in September 2012.

Officials in Shenzhen have given initial support to Sunac acquiring the founding Kwok family’s stake, the person said today, asking asked not to be identified because discussions haven’t been made public. City officials have met Chairman Kwok Ying Shing in Hong Kong several times since he resigned from the company on Dec. 31, the person said.

“There would be no point acquiring the listed Hong Kong company if creditors, both onshore and offshore, weren’t bedded down,” said John Marsden, a partner in Hong Kong at Mayer Brown JSM, a law firm that’s advising some of Kaisa’s offshore creditors. A takeover means “the Kwok family will need to be involved.”

Projects Blocked

Family interests associated with Kaisa’s founder and chairman own 49.25 percent of the Hong Kong-listed developer while Shenzhen-based Sino Life Insurance Co. holds 29.94 percent, according to data compiled by Bloomberg.

Kaisa missed a $23 million coupon payment on its 2020 notes on Jan. 8. Unless it makes the payment on Feb. 7, when its 30-day grace period expires, it will become the first Chinese developer to default on its U.S. currency debt.

Several Kaisa executives, including Kwok, resigned last month, and people familiar with the matter said on Jan. 13 the homebuilder is being investigated over alleged links to a senior official in the southern Chinese city.

On Wednesday, Kaisa said it’s seeking to appoint Houlihan Lokey (China) Ltd. as its financial adviser, adding the board “expects to formulate and implement the plan to improve the financial position of the group, taking into account the findings of the financial adviser, and the company will update the market” following the completion of the assessment.

Sunac Tipped

Kaisa had 79.9 billion yuan ($12.8 billion) of liabilities as of June 30 last year, according to its latest published financial accounts. Its 105.6 billion yuan of assets included

9.4 billion yuan of cash.

Sunac was tipped by its chairman as the firm most likely to take over the beleaguered company earlier this week. The company, based in the northern city of Tianjin, would probably be more interested in picking up Kaisa’s assets in Shanghai and in western parts of the country rather than acquiring the whole business, CMB International Capital Corp., a unit of China Merchant Bank Co., said in a Jan. 28 note. Sunac suspended trading in Hong Kong today.

“A piecemeal asset sale to different parties may produce some financial relief,” Christopher Yip, a Hong Kong-based credit analyst at Standard & Poor’s, said in a Jan. 29 report. “A complete takeover may trigger the change-of-control clause in the offshore bonds. This situation may take time to unravel and resolve.”

Developer Interest

A full takeover of Kaisa may require a general offer for the company, which has a market value of about HK$8.2 billion ($1.1 billion). Kaisa’s shares plunged 47 percent in December before being suspended from trade Dec. 29. If a takeover offer triggers a change-of-control clause, Kaisa may be forced to redeem, or buy back, its dollar bonds at a price higher than the current market level, according to S&P.

“Clearly a lot of the details are still unknown but there’s a chance of a deal being done,” said Ashley Perrott, the head of pan Asia fixed income in Singapore UBS Global Asset Management, which owns some of Kaisa’s bonds. Kaisa’s “assets are pretty valuable and sizable and I can see why other developers are keen on them.”

Kaisa’s 2020 debt covenants require that before an event of default can be formally called, investors holding 25 percent of the notes must instruct the notes’ trustee to declare it so.

White Knight

It’s unlikely that a white knight can rescue Kaisa without bumping up against the city’s takeover rules, according to Chee Keong Low, an associate professor at the Chinese University of Hong Kong. The Hong Kong Code on Takeovers and Mergers defines control as a holding, or aggregate holdings, of 30 percent or more of the voting rights of a company, irrespective of whether that holding or holdings gives any de facto control.

“If someone has almost half the shares and another company gets a majority, there may still be a change of control that could affect the listing status of the company,” said Low, who used to be a member of the Hong Kong stock exchange’s listing committee. “Legally it’s not easy but the unexpected has been known to happen in China.”

According to the law firm Deacons, the acquisition of all the shares of a listed company can be effected either by way of a general offer followed by a compulsory acquisition or, with the cooperation of the listed company, by a scheme of arrangement. Once an acquirer becomes the 100 percent owner of a listed company, it will usually apply for withdrawal of the listing.

“Our impression is the government will get some support for Kaisa and not let it fall or go under because of the wider fall out on the market,” Mayer Brown’s Marsden said. “Whether this is done through an asset purchase or a holistic approach involving onshore and offshore is a big question mark. I don’t think anyone has any clarity on this except the government.”

(Updates with bond prices from second paragraph.)
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