HK-Listed Kaisa Said to Go Bankrupt — Halt Payments to Creditors

Kaisa Group, which defaulted on a $51.6 million loan last week, is said to have become the biggest of China’s real estate developers to go bankrupt today when the Hong Kong-listed company decided that it was ceasing all activities until it could work out a plan with its creditors.

The potential for Kaisa to collapse was first tipped by Mingtiandi on January 2^nd, after the first loan default.

According to reports in the local media, Kaisa’s board met this afternoon and decided to halt operations. The board decision is said to have come the same day that the company announced that two of its project partners had accused Kaisa of being in breach of its obligations with regard to project partnerships and were demanding RMB 1.2 billion ($196 million) in refunds from the troubled developer.

Kaisa has yet to make any official statement on the matter, but later media reports have said that the company denies having gone bankrupt or that there was a board meeting this afternoon.

The HSBC loan default, as well as the declarations from the company’s partners revealed today, had put the developer, which as recently as two years ago had ranked 17^th among China’s biggest real estate companies, at risk of other creditors calling in loans and debentures under cross-default clauses.

Kaisa’s bankruptcy, if confirmed, is likely to pour cold water on investor enthusiasm for shares and bonds from China’s real estate developers, just as the sector had been enjoying a rally on local and regional markets. No official statement from the company has been made yet, and will most likely not happen until the Hong Kong stock market reopens tomorrow morning.

Kaisa Partners Sought RMB 1.2B in Refunds

In a statement to the Hong Kong stock exchange dated today, the Hong Kong-listed developer revealed that two unnamed partners from two separate projects in Shenzhen had indicated that they considered Kaisa to be in breach of its obligations under the partnerships. The two projects in the city’s Longgang district are among four projects frozen by the Shenzhen city government for unspecified reasons.

Kaisa indicated that it had first been informed of the alleged breach of contract on December 31^st, one day before it received a default notice from HSBC regarding a HK$400 million ($51.6 million) loan. No reason was given for Kaisa to have withheld information regarding the accusations from its partners until this time.

Kaisa Had Been at Risk of Further Defaults

According to Kaisa’s statement, in addition to the notice from its two partners, the developer also received demands for repayment from a bank, which had made loans tied to the projects, for repayments of a credit facility granted in part to finance the developments.

While the announcement did not mention the exact amount of the project loan, it did specify that the demand from the lender meant that Kaisa now had debt liabilities of RMB 797.2 million ($128.29 million), acknowledging the earlier demand for repayment of a HK$400 million ($51.6 million) loan from HSBC.

While the most recent notice seems to have added another $76.69 million to Kaisa’s debt, the company did point out in today’s statement that, despite the possibility of its existing problems triggering cross-default clauses in other loans, no other lenders had demanded repayment of the companies other debts.

Even before news of the bankruptcy was broken in the local press within the last hour, the financial turmoil had driven the value of some of Kaisa’s bonds down to 35 cents on the dollar. Kaisa’s credit rating has also taken a beating, with Standard & Poor’s yesterday downgrading the developer’s status to SD from BB-, signifying that it was already in default on at least one of its obligations.

Trading of Kaisa’s shares has remained frozen since December 24^th.

Are China’s Real Estate Developers Too Big to Fail?

Kaisa’s default and now apparent bankruptcy has put serious dents in, if not completely shattering, the concept that China’s government would always bail out troubled companies.

The collapse of a small local developer in Ningbo, Zhejiang province in March 2014 caused markets to shun Chinese bond issues and drove up the cost of financing for an industry that had grown accustomed to cheap, easy credit.

Following soon after Chaori Solar became the first Chinese company to default on a commercial bond, the new degree of commercial uncertainty was a shock to a market which had previously assumed that China’s government was too afraid of negative publicity to allow messy bankruptcies and that government lenders would always roll over loans.

And Kaisa, which had turnover of RMB 19.5 billion ($3.14 billion) in 2013, is many times larger than privately held Zhejiang Xingrun ever was.

While some analysts believe that state-owned insurer Sino Life, which is the second largest shareholder in Kaisa, will be able to work out a plan to bail out the troubled developer, even a prolonged work-out from bankruptcy is likely to have a negative impact on a real estate industry that has been struggling through eight months of declining housing prices.

Some People in Shenzhen Must Not Like Kaisa Very Much

The crux of Kaisa’s distress seems to come from issues it has been embroiled in with the Shenzhen government.

The company first announced on December 4^th that sales of three of its projects in the southern metropolis had been frozen, apparently without explanation, by the local authorities. Then on December 21^st, it revealed that sales of a fourth project had also been halted.

The company also saw its major shareholder and now former chairman Kwok Ying-shing sell down his stake in the company and resign. Kwok was joined on the way out by a vice chairman and the company’s CFO, all of whom were replaced on the board by nominees from the state-owned insurer who bought up Kwok’s shares.

Earlier, Kwok had been rumoured to have been detained by authorities with regard to an anti-corruption investigation, but those reports have never been verified.

Kaisa Unable to Renegotiate Debts

More puzzling was Kaisa’s inability to roll-over or renegotiate its relatively minor $51.6 million loan from HSBC, especially after other developers have been able to talk their way out of seemingly more dire situations.

Even with its chairman in detention and its stock in free-fall, Agile Property was able to squeeze a one year extension on $265 million in loans from HSBC and other banks as recently as October.

Given the lack of tangible benefit to HSBC to declaring the default, and the likelihood that Kaisa’s partners would face protracted battle in extricating themselves from the project partnerships, it seems that some of these companies that have been working with Kaisa found some compelling reasons to try to distance themselves from the Shenzhen developer.

And for Kaisa, the unwillingness of its existing partners to continue working with the once high-flying developer has now made it the biggest loser to date in China’s biggest real estate downturn.