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HONG KONG, Dec 7 (Reuters Breakingviews) – China’s property tycoons face a choice between giving up control or risking insolvency as the sector’s liquidity crunch deepens. This is a marked contrast to previous crises, when founding chairmen mostly found ways to cling to their control stakes.
Developer Agile (3383.HK) highlighted the problem last month when it sold bonds which, upon maturity, convert into shares of its property management unit, A-Living Smarty City Services (3319.HK). Now bondholders are trying to push Kaisa Group (1638.HK), one of the largest offshore borrowers, to consider a similar deal as part of a broader package of funding suggestions.
There are many potential candidates for exploiting the type of convertible debt used by Agile, known as exchangeable bonds. Over the past four years, around 30 developers have listed minority stakes in their managers on the Hong Kong stock exchange to capitalize on the lure of low-capital companies with long-term contracts for garbage removal and lawn mowing.
Agile’s deal allows it to borrow $310 million over five years at 7%, well below the 20% involved in negotiating its equivalent unsecured debt. When the bonds mature, investors will be repaid with 6.2% of A-Living’s shares, reducing Agile’s stake to 48%.
The structure will not work for everyone. Some groups may not have enough unencumbered equity after pledging shares as loan collateral, while others have structured their leaders as sister companies rather than subsidiaries. Investors must also believe that their bet will survive the cash crunch.
Kaisa’s Prosperity unit is small with a market value of $258 million. Even with stakes in a construction equipment company, a newspaper group and an electronics component maker, boss Kwok Ying-shing would not come close to covering the $400 million obligation due for reimbursement on Tuesday. Bondholders have formally offered to abstain if Kwok will discuss their other funding suggestions, including exchangeables.
This means that these agreements should only be part of a larger whole. The founders are already taking the plunge in other ways that are shrinking their grip: Last month, $8 billion Sunac China (1918.HK) raised $950 million by selling new shares and a stake in Sunac Services (1516 .HK). Founder Sun Hongbin also loaned the company $450 million interest-free.
The tycoons’ new flexibility in ownership underscores how the current crisis has put them all in the hot seat.
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– Kaisa Group investors are the latest to suggest the struggling developer consider some type of convertible bond to help fund the liquidity crunch affecting China’s vast real estate sector.
– A group of bondholders has offered forbearance on a $400 million bond to be repaid on Dec. 7 if the company discusses its suggestions to provide up to $2 billion in new funding to the company. One of them includes the purchase of bonds which, at maturity, would be exchanged for shares of Kaisa Prosperity, the developer’s property management unit, as well as its other companies.
– On November 18, rival Agile Group sold $310 million of five-year bonds which, at maturity, will be exchanged for shares in A-Living Smarty City Services, its property management business, at a price of this amount.
– The two units were split in 2018. Agile owns 54% of A-Living, while Kaisa owns 67% of its subsidiary.
Editing by Antony Currie and Katrina Hamlin
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