Attempts by Kaisa Group to stonewall its creditors in the face of serial defaults appear to be backfiring after bank accounts belonging to the Hong Kong-listed developer were frozen, and bond-holders began banding together for legal action.
The defaulting developer’s wall of silence was broken this week when it was forced to admit to the Hong Kong stock exchange that several of its bank accounts had been frozen by the courts, after domestic creditors sued the company in the wake of defaults on a $51.6 million loan as well as on more than $26 million in interest payments.
Signs also emerged this week that Kaisa may have trouble selling off existing assets to raise desperately needed cash, after an asset sale to China Vanke was terminated by the buyer.
With the developer’s situation sinking from distressed to dire, foreign bond holders are now said to be grouping together for legal action in an attempt to claw back some value from Kaisa’s more than $1.95 billion in offshore bonds.
Accounts Frozen After Creditor Suits
Kaisa’s failure to repay a HK$400 million ($51.6 million) loan at the end of last month, followed by a January 8th default on $26 million in interest due on a $500 million bond, led to at least 15 Chinese domestic financial institutions filing claims against the developer’s assets via China’s court system.
The response by China’s judiciary was swift, with Kaisa finally announcing on Monday that,
As at 9 January 2015, several bank accounts of the Group were frozen and under investigation by several banks with a total bank balance of approximately RMB447 million ($72 million) and RMB266 million ($43 million).”
Kaisa did not indicate how many bank accounts belonging to the company were still active. When it last issued public financial statements Kaisa indicated that it had more than RMB 9 billion in cash on hand as of June 30th last year.
In the same announcement, Kaisa admitted for the first time that it had missed the interest payment on its bond the previous week, and said that it was seeking a financial advisor to help it navigate the current crisis.
No Sign of Thaw in Kaisa’s Political Challenges
Unfortunately for creditors hoping to win back some of the developer’s billions of dollars in debt, Kaisa’s announcement made no mention of any change regarding its most critical challenge – the government freeze on its projects in Shenzhen’s Longgang district.
Four of Kaisa’s developments in the southern Chinese metropolis, including the nearly one million square metre mixed-use Kaisa Central Plaza, have been blocked by the government from selling new units since December of last year.
The sales freeze has never been explained by the Shenzhen authorities, however, it is thought to be related to dodgy dealings between Kaisa and a Longgang official who was dismissed from office on corruption charges last December.
This connection with the fallen official is also thought to have been the cause of the resignation of former Kaisa chairman Kwok Ying-shing and other board members last month.
Vanke Backs Away From Rescue Attempt
Further underlining Kaisa’s woes is the failure of its attempt to sell off a 90,000 square metre site in Shanghai’s Qingpu district to raise desperately needed cash.
In its announcement this week Kaisa revealed that the previously agreed to sale of the site to China Vanke, which would have netted around RMB 8.78 million for the distressed developer had been terminated.
According to local news reports, Vanke was ultimately scared off from the deal by the possibility of the desperation sale being overturned by courts acting on behalf of creditors, if the sale is seen to be below market value.
Bond Buyers Take Heart Over HSBC’s Futility
One item in Kaisa’s announcement that investors found encouraging was the developer’s revelation that HSBC had agreed to waive immediate repayment of the HK$400 million ($51.6 million) loan that the developer had defaulted on as of December 31st.
According to a story in the Wall Street Journal today, some of Kaisa’s bonds jumped by more than 44 percent to as much as 49 cents on the dollar following Kaisa’s announcement, as investors apparently took heart over the bank’s newfound leniency.
However, given that HSBC was the first of Kaisa’s creditors to decide to pursue repayment of debts, the waiver by the bank could also be seen as admission that it has no clear path to collecting on Kaisa’s obligations.
Bondholders Organising Legal Action
This more negative outlook on Kaisa’s financial situation is reflected in the decision by investors holding more than 30 percent of one of Kaisa’s offshore notes to retain a law firm and consider action to collect on Kaisa’s offshore obligations.
The law firm Kirkland & Ellis LLP is also said to be organising holders of five other Kaisa offshore bonds, according to the Journal account.
While the precise list of the developer’s bond holders has not been disclosed at this time, in recent months such big name financial managers as Blackrock and Fidelity Investments have been carrying Kaisa’s debt.
Foreign Bondholders Last in Line
While the decision by buyers of Kaisa’s offshore debt is likely to be welcomed in legal circles, holders of the company’s offshore notes could be in for considerable frustration should Kaisa finally collapse.
In previous cases of Chinese corporate failures the Chinese government has first ensured that local creditors receive distributions from whatever assets of the company can be liquidated.
After formerly high-flying solar energy firm Wuxi Suntech went bust in 2013, mainland creditors got back 30 cents on the dollar following the company’s restructuring (according to a separate account in the Journal). Offshore bond-holders are still yet to receive anything.
Will Kaisa’s Stumbles Open the Door for More Private Equity Financing?
While we may still be far away from knowing Kaisa’s ultimate fate, its struggles are already scaring investors away from Chinese developer debt. According to BOA Merrill Lynch, its index of US dollar denominated debt from Chinese companies (most of which comes from the property sector) is down 4.2 percent in just the last two weeks.
This decline marks a change in international understanding of debt from China’s largely government-linked developers. Where investors formerly believed these bonds to be at least implicitly-backed by the Chinese government, that virtual guarantee is rapidly vaporising.
In place of what was once a guarantee of success for the developers – or at least a guarantee of a bail-out, is the spectre of an otherwise seemingly healthy developer – like Kaisa – being impaled on the talons of China’s anti-corruption movement.
This newly-recognised element of risk will not be all bad for the region’s property investors, however, as the impending drought of overseas debt issues by China’s developers could open the door to additional demand for financing from private equity and institutional fund managers in 2015.