Kaisa Saved From Default by Sunac Buyout

China’s Kaisa Group may have been saved from default today when Sunac chairman Sun Hongbin announced that his company would be acquiring a 49.3 percent stake in the troubled real estate developer.

Sun said in an interview at Kaisa’s headquarters in Shenzhen that Sunac had reached a preliminary agreement with Kaisa’s management to acquire the controlling stake from the family of former Kaisa chairman, Kwok Ying-shing. However, Sun cautioned that the deal still had at best a 50 percent chance of success.

Kaisa is only three days from becoming the first China real estate developer to default on its overseas bond obligations after the company missed an interest payment on a $500 million note on January 8th.

Sunac Making a General Offer for Kaisa Shares

The announcement of the planned merger comes only three days after Sunac announced that it was buying four of Kaisa’s projects in Shanghai for RMB 2.37 billion ($380 million), as Kaisa struggled to pay off its bonds and other debts.

Sun told The Wall Street Journal today that Sunac’s acquisition of Kaisa is still subject to approval by the Securities and Futures Commission of Hong Kong, where both companies are listed on the stock exchange.

According to Sun, Sunac is making a general offer for shares in Kaisa.

Although no price was specified for the purchase of Kaisa stock, which has been frozen on the Hong Kong exchange since December 29th, Sun did indicate that if Sino Life were to take advantage of the offer the state-owned insurer would suffer a loss.

Sino Life upped its stake in Kaisa to 29.96 percent in early December when it acquired 11.21 percent of the company from the Kwok family for HK$2.898 per share. Kaisa’s shares closed at HK$1.60 before trading stopped on December 29th.

No explanation was given for why Sunac would first arrange to acquire Kaisa’s Shanghai projects and soon thereafter move to acquire the entire company. The acquisition of Kaisa by Sunac was widely rumoured last week, before the two companies appeared to reverse course with the announcement of the sale of the Shanghai projects on Sunday.

After the Shenzhen government blocked sales at four of Kaisa’s projects, triggering the company’s financial crisis, and later forced out Kwok, it’s assumed that the major decision-maker for all matters Kaisa related is now the local administration.

Market Sees Opportunity as Kaisa Risk Recedes

With Kaisa apparently bailed out, some investors will be scrambling to take advantage of the beaten down securities issued by other developers, especially southern Chinese private developers who suffered from guilt by association after Kaisa began to struggle.

In a note to customers JP Morgan analyst Ryan Li said that the acquisition by Sunac would end up generally favoring companies with higher refinancing needs. Li cited Guangzhou R&F, Country Garden and Evergrande as developers with greater needs for refinancing in the near future that might have gained some relief from the Kaisa bailout.

JP Morgan cited today’s bailout as providing a potential “event-driven opportunity on some underperforming names” such as KWG Property, R&F and Country Garden, that had seen their stocks and bonds suffer after Kaisa’s troubles broke.

Investors Encouraged by Apparent End to Crisis

After Sun’s announcements today Kaisa’s $500 million in notes due in 2020 rose 10.9 cents to 69.1 cents on the dollar by 5:38 pm Hong Kong time, according to a report in Bloomberg. Another set of the developer’s bonds worth $800 million rose 10.6 cents to 69.3 cents on the dollar. Some Kaisa bonds had sunk as low as 32 cents on the dollar after the company had failed to meet multiple debt obligations during January.

In order for Kaisa to return to health, and presumably in order for the deal with Sunac to succeed, the Shenzhen government will need to release its hold on Kaisa’s projects there, and the company will need to work out a debt restructuring program with its creditors.

Sunac is sitting on a pile of cash after Greentown was forced to pay back the funds Sunac put into the now failed merger of the two developers last year.

If successful the deal will provide Tianjin-based Sunac with a strong position in the Shenzhen market, along with four large projects in Shanghai.