Kaisa Rebuffs Farallon's Plan Saying It's `Questionable'

  • Farallon's proposal entailed cash injection for equity stake
  • Kaisa is first Chinese builder to default on dollar notes

Kaisa Group Holdings Ltd. rebuffed a proposal from U.S. hedge fund Farallon Capital Management LLC to recapitalize the Chinese developer, questioning its commercial viability and saying it has remote chances of passing regulatory hurdles.

The Farallon plan, which was submitted on a non-binding basis on Nov. 19, undervalued the Shenzhen-based developer compared with its market capitalization of more than HK$8 billion ($1.03 billion), Kaisa’s senior adviser Tam Lai Ling said in an interview with Bloomberg News. Farallon’s proposal entails the injection of $150 million in cash in exchange for a 75 percent equity stake in the company and calls for Kaisa shareholders to put up $500 million at a later stage to restore their stake in the company to 80 percent.

The proposal’s “commercial viability is questionable, and its implementability from a regulation perspective is remote, so why don’t we just follow the current restructuring plan, which already gathered support from many creditors?" Tam said.

The comments intensified the battle for control of the developer after it defaulted earlier this year on some of its more than $10 billion of loans and bond, including four dollar-denominated debentures with a face value of $1.95 billion. Kaisa became the first Chinese developer to renege on dollar-denominated debt after local authorities froze some of its projects amid a probe.

A person who answered two calls at Farallon’s office in Singapore said company officials couldn’t be immediately reached for comment. Farallon is based in San Francisco.

Cash Injection

Kaisa’s $800 million of 8.875 percent notes due March 2018 rose for a third day, adding 0.47 cents to 72.37 cents on the dollar as of 6:21 p.m. on Friday in Hong Kong. That’s the highest level since February.

The cash injection from Farallon needs to be escrowed for at least two years and requires “substantial” cash call on existing shareholders, which include chairman Kwok Ying Shing, if they want to restore their holding to 80 percent in the future, Tam said. Farallon also failed to disclose the identities of its consortium members, Tam said. Tam said it’s in the best interest of all Kaisa’s stakeholders to expedite a restructuring plan crafted by the company and its financial adviser.

Farallon’s plan requires Kaisa to issue equity at an implied pre-money valuation of HK$387.5 million ($50 million) which is a 95 percent discount to its market capitalization before the stock was suspended in March, Kaisa said in a separate document seen by Bloomberg.

Restructuring Drag

“From Kaisa’s standpoint, I don’t think Kwok will want to inject additional equity into the firm,” said Cheong Yin Chin, an analyst in Singapore at Creditsights Inc. “If he wants to, he would have done so before Kaisa ended up defaulting on the coupons,” she said, adding the the restructuring may take at least two to three years going by history involving Asian companies.

Kaisa said in the document that the conditions attached to the U.S. hedge fund’s plan are likely to cause significant delay and distract from the substantial efforts being made to progress its own plan unveiled on Nov. 6. It’s focused on stabilizing its business, managing liquidity, resolving onshore litigation and unfreezing assets, it added.

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