Kaisa Debt Mystery Flags Query on Home Buyers Turned Lenders

An unexplained doubling of debt at Kaisa Group Holdings Ltd. is fueling speculation that home buyers may have unwittingly turned into lenders to the troubled Chinese developer.

Kaisa said in an exchange filing yesterday that its interest-bearing debts jumped to 65 billion yuan ($10.4 billion) as of Dec. 31, more than double total borrowings of 29.8 billion yuan at the end of June. It didn’t provide further details, raising questions concerning the categorization of deposits the builder received for homes it hasn’t yet sold due to government blocks.

The developer’s woes began late last year when some of its projects were blocked in the southern Chinese city of Shenzhen, where it is being investigated over alleged links to a senior official, people familiar with the matter said last month. While a buyout offer from Sunac China Holdings Ltd. earlier this month staved off a bond default, Sunac can walk away from the deal if the debt isn’t successfully restructured.

“Advance proceeds and deposits, which totaled 31 billion yuan as at 30 June, 2014, may have somehow evolved into interest-bearing debts,” said Charles Macgregor, head of high-yield research at Lucror Analytics.

Short-Term Obligations

Such liabilities would likely be categorized as short-term debt, which typically matures within one year, according to Yin Chin Cheong, Singapore-based analyst at CreditSights Inc. Reasons for the huge jump in borrowings could also include “acceleration of debt from trade creditors such as contractors and suppliers, and lawsuits and legal actions from alleged breach of joint-venture projects,” she said.

Kaisa also has 7.9 billion yuan in claims filed against it by parties including suppliers and received court rulings to preserve 12.8 billion yuan of assets under onshore loans, according to a separate company statement today.

Conversion of off-balance-sheet debt into Kaisa’s books could be another possibility.

“It could be the case that a substantial amount of off-balance sheet debt was converted back to the books to better facilitate the debt restructuring process,” said Edison Bian, head of China property research at UOB Kay Hian.

Frank Chen, an investor relations officer at Kaisa, declined to comment when reached by phone today.

Kaisa is seeking to expedite debt restructuring as it faces as much as 35.5 billion yuan of repayments to creditors this year, the builder said in its Monday filing.

Bond Drop

Kirkland & Ellis LLP, which is representing an ad hoc committee of investors in Kaisa’s offshore notes, plans to hold a conference call at 11:00 a.m. Hong Kong-time Wednesday to update investors on restructuring talks, according to an e-mailed reply from the law firm.

Kaisa’s international bonds declined. Its $500 million of notes due 2020 dropped 0.9 cent to 55.1 cents as of 5:02 p.m. in Hong Kong. The builder’s $800 million of securities due 2018 fell 1.2 cents to 54.8 cents.

Shares of Shenzhen-based Kaisa fell 3.5 percent, the biggest decline since Feb. 11, to close at HK$1.65. The stock, which resumed trading after a suspension on Feb. 16, plunged as much as 11 percent earlier Tuesday. The stock resumed trading after a halt on Monday.

The higher-than-expected debts and legal claims “means increased difficulty for Kaisa and Sunac to resolve those issues and lowers the chance for the stake acquisition deal to go through,” said Rui Guo, Hong Kong-based credit analyst at Mitsubishi UFJ Securities Ltd.

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