Could China property firms' bond extensions become more complex?
Separate extensions for China property companies' onshore and offshore debt could be a reason to avoid complex debt restructuring. R&F and China South City had simple extensions while Fantasia's possible debt-equity swap might be slightly more complex. Overall, Indonesian-style restructuring with tranches appears less likely for China property developers.
Shimao may use installments to mitigate longer extension Shimao might use installments to mitigate its potentially longer extension period for some of its Kungfu bonds, according to Debtwire. A longer extension period, compared to its peers, could reduce the risk of another round of restructuring and avoid a debt-equity swap. The installment arrangement would reduce the average life of the new bonds while the payment-in-kind structure could provide developer a buffer on cash flow. The developer could choose pay in kind by delaying coupon payment with a higher rate of 5.5% instead of a cash coupon of 4.5%.
Guangzhou R&F extended its Kungfu bonds to new straight bonds maturing in 2025, 2027, and 2028 with no installments. China South City pushed out its Kungfu bond maturities to two straight bonds and three sinkable bonds maturing in different months of 2024.
Shimao's interactive potential debt plan
Source: Bloomberg Intelligence
Fantasia's potential plan with debt-equity swap has options Fantasia's potential debt plan with debt-equity swap might have viable options. The developer might term out its Kungfu bonds for five to seven years and swap 30-50% of debt into equity, according to Debtwire. While no details on the rationale for the debt-equity swap is available, investors might also consider other alternatives such as swapping part of debt into convertible bonds or preference shares. There might be a need for a more detailed cash flow forecast to justify the debt-equity swap and its proportion. One disadvantage about swapping debt into shares is possible dilution on rights issue or share placement. Convertible bonds with a low coupons with higher principal at back-end could be an option. Preference shares would be another option although it is not popular for an additional class of shares.
Fantasia's potential debt plan
China property developers are less likely to use complex plan
China property developers might be less likely to use complex restructuring plans, underpinned by separate restructuring exercises onshore and offshore. Onshore debt's structural senior ranking for separate restructuring from offshore debt would eliminate the need for a senior tranche. Indonesian companies tend to use restructuring that comes with a cash flow waterfall mechanism to trap cash from operations to serve in the order of senior tranche (A), junior tranche (B), and subordinate tranche (C), plus an equity for loss absorption and upside sharing (D). Bumi Resources' debt plan in 2017 could be an example for full-blown debt restructuring. While some Indonesian companies manage to avoid defaults by borrowing bank loans to refinance dollar bonds, China property developers are unlikely to follow the same path.
Example of Indonesian debt restructuring
Source: CF<GO>, Bloomberg Intelligence
