China Vanke needs to provide more incentives after creditors reject proposals
China Vanke said it plans to call a second bondholder meeting to seek solutions after creditors rejected all three proposals by the company for delaying repayment of a RMB 2 billion ($283 million) bond due 15 December.
China’s one-time largest said in a filing on Monday that it has a grace period of five working days before its default on the medium-term note 22 Vanke MTN004 becomes official, during which time it plans to hold fresh negotiations with creditors. Vanke is set to meet with note holders on Thursday morning, according to a separate filing.
“The company will communicate and negotiate honestly with all parties, study and improve the initiatives, continue to seek solutions for this tranche of bonds and safeguard the long-term common interests of all parties,” Vanke said.
During the grace period, interest is calculated at the coupon rate plus 5 basis points, based on the unpaid principal and interest due for the current period.
More Enhancements Needed
In a meeting on 10 December Vanke needed to win approval from holders of more than 90 percent of the voting rights for the notes to gain permission to defer repayment, but the developer’s three proposals all fell short, according to results revealed by the developer.
Huang Liping took over as chairman at China Vanke earlier this year
The first proposal by Vanke, which included no incentives for creditors, received no support, while a second offer with credit enhancement received approval from note holders controlling 83.4 percent of voting rights. A third offer, which also included enhancements, received support from 18.95 percent of creditors.
“We think Vanke’s bondholders may demand more credit enhancement or earlier repayment of some principal for the bonds due on 15 December. The second option is close to being approved, so we are hopeful that a deal could be reached in the next five days,” Jeff Zhang, an equity analyst at Morningstar, told Mingtiandi.
“That said, Vanke still relies heavily on external liquidity support even for the interest payment. Hence, the credit risk of Vanke remains elevated,” he added. “If bondholders request immediate interest payment but Vanke could not meet the obligations, then the company will likely shift to a holistic debt restructuring. This could lead to essential defaults and further rattle the homebuying sentiment.”
All three of Vanke’s proposals seek to defer principal repayment by one year to 15 December 2026 and keep coupon rates unchanged at 3 percent.
The second proposal, which won the most support, mandates on-time payment of interest on 15 December this year, a full irrevocable joint-liability guarantee by Shenzhen Metro or a Shenzhen state-owned enterprise, and repayment priority over later-maturing bonds.
The third proposal similarly mandates on-time interest payment and the addition of credit enhancement but does not offer repayment priority.
Risk of Marketwide Damage
Vanke spooked the market in late November when it first announced it would seek extension of the RMB 2 billion note. The note’s grace period expires on December 22 – coinciding with Vanke’s scheduled meeting with holders of 22 Vanke MTN005, a separate RMB 3.7 billion medium-term note maturing on December 28.
The total principal and interest of the two notes amounts to RMB 5.871 billion.
“If Vanke ultimately defaults, we think the ramifications on the China property sector can be significant. Investors may be more concerned about the balance sheet and government’s attitude towards bailout for even the ‘safe names’,” said Morningstar’s Zhang.
Vanke has relied on support from its controlling shareholder, Shenzhen Metro Group, to avoid default this year, receiving RMB 30.796 billion in shareholder loans from the state-run metro operator.
In recent weeks, however, Shenzhen Metro has begun demanding more credit guarantees, with Vanke having late last month pledged its 57.16 percent stake in its Onewo Hong Kong-listed property management unit to Shenzhen Metro as loan collateral.
Rating agency S&P Global Rating in late November downgraded Vanke’s credit rating to CCC-, which is just two categories away from default on the company’s scale, Fitch also downgraded some of Vanke’s notes earlier this month.
Vanke’s Hong Kong-listed shares plunged 5.16 percent on Monday while its onshore shares fell 2.99 percent. Since 26 November, when it announced plans to delay an onshore bond repayment for the first time, the firm has lost 15.7 percent of its Hong Kong-listed share market capitalization and 19.2 percent of its A-share market cap.
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