Will The 'Second Arrow,' 16 Measures End China’s Real Estate Debt Crisis? (Nov. 1- Nov. 14)

 

In this column, Reorg editors and reporters take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia. Any opinions or other views expressed in this column are the author's own and do not necessarily reflect the opinion or views of Reorg or its owners. Send your people and fund news to asiaeditorial@reorg.com.

The market is elated.

Over the past week, news of China’s latest real estate rescue policies – including the central bank’s RMB 250 billion ($34.82 billion) funding support to bond issues through the so-called "Second Arrow" program and an official policy which includes sanctioning bank loan extensions (16 measures) – sent offshore real estate high-yield bond prices on a tear. On Monday morning, Nov. 14, Country Garden was up 12 to 15 points across the curve, Agile was up 13 to 15 points and Longfor Group up 10 to 12 points.

A concurrent stock rally also saw CIFI Holdings soaring 76% on Friday, Nov. 11 alone, and Country Garden up as much as 50% Monday morning after rising 35% on Friday.

There is optimism in abundance. This could be the turning point people had long hoped for. The central bank is stepping in. A Hallelujah moment.

In its Nov. 8 announcement, the National Association of Financial Market Institutional Investors, or NAFMII, specified that the central bank’s funding support could take the form of guarantees, credit enhancements, credit risk mitigation warrants, or even direct bond purchases. If it pans out, direct bond purchases would certainly mark a sharp contrast from the previous real estate stimulus policies which tended to focus on rescuing projects -- i.e. guaranteeing delivery of homes, rather than rescuing companies.

But will it pan out? NAFMII’s announcement also noted that the central bank’s funding support will be provided in keeping with market principles and the rule of law. Will the market and the law support the idea of sinking what can be expected to be a sizable portion of the RMB 250 billion into the real estate sector?

Let’s say they do. Setting aside the fact that RMB 250 billion is a drop in the bucket compared to the sector’s $292 billion (RMB 2,058 billion) total borrowings coming due at the end of 2023 or earlier, to access that RMB 250 billion, what will be the price, and who can afford that price?

In its notice to banks, the central bank and CBIRC make reference to “equal treatment of privately held and state-owned enterprises,” but not all private companies are equal.

As we reported, the first batch of private developers selected for the "Second Arrow" issues were Longfor, Seazen and Midea, all in relatively better financial condition and in possession of valuable commercial real estate assets. Compared with previous issues, China Bond Insurance is reported to be willing to increase the loan-to-value ratio for its guarantees, but in return, has higher requirements for assets’ quality and location.

How many among those developers not in default have prime location commercial assets?

Country Garden and the other private developers in dire need of liquidity are applying. The jury is still out on how much will materialize.

The market has read these developments as a huge positive. But perhaps we want to hold off reading too much into the reactions as a sign of fundamental changes. It’s a volatile market, and people got carried away before. In August, on the back of the China Bond Insurance guarantee program, real estate names rallied some 20 points over a single week. Country Garden’s $1 billion 8% due 2024 notes were up 23 points to 57, and CIFI’s $300 million due 2023 notes went up 21 points to 82. Emotions ran high.

We all know what happened next. CIFI defaulted, tanking the entire market on its way down.

Around noon Monday, Nov. 14, Country Garden’s 8% due 2024 notes were indicated at 48/49, that was after rising 15 points over Friday’s close.

So far this year, the 8% due 2024 notes have fallen 53 points. There is still a long way ahead to recovery.

There are signs that the market’s exuberance this time is rational, even targeted. By afternoon today, CoGard and Seazen’s bonds had given up some of their gains, though both were still up around as much as 12 points on the day.

But it was only the higher quality Chinese real estate names that saw significant gains. While government policy support is certainly more decisive this time around, the market read is that support for already defaulted or deeply distressed developers may be quite limited.

–Anna Zhang, Senior China Reporter

From Our Financial & Legal Analysts
Below are links to recent reports written by our financial and legal analysts:

Azure Power Global

Reorg’s tear sheet highlights how governance issues could jeopardize fresh financing required to fund Azure’s FCF deficit, growth capex needs and short-term debts. On the other hand, key positives for this credit - should it overcome its corporate governance issues - include relatively high central government counterparty exposure and high revenue visibility from 25-year power purchase agreements. The analysis is rounded up with a peer comparison with Adani Green, Greenko and Renew Power, other USD issuers in the Indian renewable space.

Greenland Holdings Group Co. Limited

Reorg’s legal analysis explores potential dissenting creditor actions against Greenland Holding’s proposed consent solicitation across nine series of its offshore notes. It also casts a spotlight on the company’s recent disposal of a U.S. asset, set against the timing of the consent solicitation and the company’s guidance that it will not be able to redeem its due Nov. 13 notes. Finally, the analysis looks at potential noteholder actions against the notes’ Mainland guarantor.

San Miguel Corporation

Reorg’s recent analysis highlights the potential opportunistic nature of SMC Global Power’s $400 million capped tender offer for its USD senior perpetual capital securities at >30 cents discount, given that the coupon reset and step-up structure provides a strong incentive for redemption on the first call date in April 2024. It turned out that only $124 million of valid responses were received. The analysis further considers the cross-default linkage with parent company San Miguel Corporation’s debt obligations and assesses the likelihood of parental support in light of the company’s weakening cash flow profile.


Reorg Asia Watchlist

AUSTRALIA

AJ Lucas

Drilling services and gas exploration company AJ Lucas quarterly activities report for the period ended Sept. 30 shows net cash used in operating activities increased AUD 5.5 million ($3.54 million) driven primarily by an increase in receivables and contract assets (unbilled receivables) of AUD 9.5 million compared with June 30, 2022. Amounts outstanding under an 18% related party loan from majority shareholder Kerogen rose to AUD 59.6 million on no cash interest being paid, and an unrealized foreign exchange loss.

Read Reorg’s coverage of AJ Lucas HERE.

GenesisCare

Global oncology services provider GenesisCare’s net leverage reached 40x at the end of September after earnings continued their downward trajectory. According to the group’s covenant compliance certificates, LTM consolidated EBITDA fell to just $35.6 million by the end of September from $60.5 million at the end of June and $91.6 million at the end of March, sources said.

Read Reorg’s coverage of GenesisCare HERE.


CHINA

China Real Estate

China Bond Insurance Co. plans to significantly raise the loan-to-value, or LTV, ratio for collateral posted as counter-guarantee from issuers. A higher LTV ratio means that less collateral is needed for the same amount of financing or for collateral of the same value, more financing can be obtained. One source said the LTV ratio for this round of financing can be as high as 100%, provided that collateral consists of premium assets such as core properties in higher-tier cities.

Read Reorg’s coverage of China Real Estate HERE.

CIFI Holdings

PJT and Houlihan Lokey have separately approached holders of CIFI’s USD bonds, seeking to form ad hoc groups, after CIFI announced that it was exploring a holistic solution to its offshore debt obligations. We spoke to four sources in total, who confirmed that PJT held a call with bondholders on Nov. 3, and that Houlihan Lokey had contacted holders separately.

Read Reorg’s coverage of CIFI HERE.

Dalian Wanda Commercial Management

The company management told investors that it has arranged sufficient funds to redeem $400M notes due Dec. 5. The property management company had seen its bonds drop in recent weeks, which as reported was due to a selloff by one of the largest public funds trying to pare its real estate exposure.

Read Reorg’s coverage of Dalian Wanda Commercial Management HERE.

China Fortune Land Development

Alvarez & Marsal and Latham & Watkins, advisors to an ad hoc committee of CFLD offshore bond holders, told investors on a call that the AHC has instructed the trustee to prepare documents for filing a winding-up petition against the issuer and/or the guarantor as a statutory demand expires on Nov. 10. CFLD separately announced that holders representing over 50% of offshore bonds have acceded to the RSA, and that it intends to initiate an English scheme of arrangement.

Read Reorg’s coverage of CFLD HERE.

Longfor Group

Longfor management during private conversations with investors refuted rumors that it will move its corporate headquarters to Shanghai from Beijing, and that it is in talks to sell equity interests to Shanghai-based state-owned enterprises. Longfor bonds had dropped at the end of December following the former chairwoman’s surprise resignation announcement. The bonds have subsequently recovered somewhat amid a broader rally.

Read Reorg’s coverage of Longfor HERE.

Logan Group

PJT and Ropes & Gray, advisors to an AHG of Logan’s offshore bond holders, told investors that winding-up petitions filed against Logan constitute a defensive measure, and that a consensual restructuring deal with the company remains the group’s goal. The advisors said the company has not engaged in a meaningful way, and that a preliminary restructuring plan for onshore debt had come as a surprise to the AHG.

Read Reorg’s coverage of Logan Group HERE.


SOUTH ASIA

Vedanta Ltd. / Vedanta Resources

Vedanta Resources Ltd. (VRL) expects to raise around $500 million each quarter in loans from public sector banks to repay or refinance its upcoming debt maturities until June 2023. The company is keen to utilize low-cost loans raised from state-owned banks at around 8.5% to meet its debt obligations, and to keep dividends from its Indian listco Vedanta Ltd. as a last resort to repay debt.

Read Reorg’s coverage on Vedanta Resources HERE and Vedanta Ltd. HERE.

KSK Energy

Varde Partners-backed Aditya Birla Asset Reconstruction Co. Ltd., and Kotak Mahindra Group-sponsored Phoenix ARC Pvt. Ltd. have separately submitted expressions of interest (EoI) in a Swiss challenge auction for INR 6.31 billion ($77.9 million) NPLs of KSK Mahanadi Power held by state-owned Life Insurance Corporation of India. RARE Asset Reconstruction Ltd.’s INR 1.88 billion bid triggered the Swiss challenge auction.

Read Reorg’s coverage on KSK Energy HERE.

India NPLs: Meenakshi Energy

National Asset Reconstruction Company Ltd.’s (NARCL) INR 10.03 billion ($122.3 million) offer to a consortium of lenders led by State Bank of India (SBI) for INR 36.19 billion NPLs of Andhra Pradesh-based thermal power company Meenakshi Energy Ltd., has triggered a Swiss Challenge auction.

Read Reorg’s coverage on India NPLs HERE.

SOUTHEAST ASIA

Alam Sutera Realty

Indonesia property developer PT Alam Sutera Realty Tbk has repurchased and cancelled $10.92 million in aggregate principal amount of originally $171.4 million 8% senior secured notes due May 2, 2024. The company has also irrevocably elected to redeem and pay on Dec. 10 all the remaining outstanding of the due 2024 notes at a redemption price equal to 100% of the outstanding principal plus accrued and unpaid interest.

Read Reorg’s coverage of Alam Sutera HERE.

Medco Energi Internasional

Indonesia oil and gas company PT Medco Energi Internasional’s subsidiary Medco Platinum Road Pte. Ltd, as issuer of originally $500 million 6.75% senior notes due 2025, has completed a offer to purchase for cash up to $250 million plus accrued interest for the notes, which are guaranteed by Medco Energi Internasional and its subsidiaries.

Read Reorg’s coverage of Medco HERE.

Garuda Indonesia

Indonesia flag carrier PT Garuda Indonesia (Persero) Tbk unaudited financial statements for the nine months ended Sept. 30 show a 159% year-over-year increase in third-quarter 2022 operating revenues to $627 million from $242.2 million in the same period a year earlier. Operating expenses rose 7% year over year to $640.6 million in the third quarter of 2022.

Read Reorg’s coverage of Garuda HERE.

Kawasan Industri Jababeka

Indonesia property developer PT Kawasan Industri Jababeka Tbk (Jababeka) announced on Nov. 8 that it has launched an exchange offer for its outstanding $300 million 6.50% guaranteed due Oct 2023 senior notes issued by subsidiary Jababeka International B.V, for new guaranteed due 2027 senior notes to be issued by Jababeka and guaranteed by various subsidiaries. A concurrent consent solicitation accompanies the proposed exchange. Three noteholder sources told Reorg that they are pleased with terms of PT Kawasan Industri Jababeka Tbk’s (Jababeka) exchange offer for its $300 million 6.5% guaranteed senior notes due October 2023, particularly in relation to the cash payment terms.

Read Reorg’s coverage of Jababeka HERE.

Lippo Karawaci

Indonesian healthcare and property conglomerate PT Lippo Karawaci Tbk (LPKR) announced on Nov. 3 its nine month 2022 results for the period ended Sept. 30, reporting third quarter 2022 revenue of IDR 3.73 trillion ($337.1 million), up 0.2% year over year. The company also reported third quarter 2022 consolidated EBITDA of IDR 704 billion. In an earnings call, CEO John Riady said the company has interest to potentially increase its stake in subsidiary PT Siloam International Hospitals and has no current plans to buy back further bonds or to refinance the bonds, as pricing levels, terms and security required by banks in the current macro-economic environment don’t “make sense”.

Read Reorg’s coverage of Lippo Karawaci HERE.

Golden Energy and Resources

Golden Energy and Resources Limited (GEAR) announced to the Singapore Exchange on Nov. 9 that the company proposes to undertake a distribution in specie of all of its shares in the capital of PT Golden Energy Mines Tbk (GEMS) to shareholders of GEAR through a combination and concurrent implementation of a dividend in specie and capital reduction. Further and in connection with the proposed distribution, GEAR proposes to seek the voluntary delisting of its share from the Singapore Exchange Securities Trading Limited (SGX-ST), pursuant to listing rules.

Read Reorg’s coverage of GEAR HERE.

GLP

Singapore-headquartered global logistics firm GLP Pte Ltd.’s bonds dropped from two to 5.5 points on Nov. 10 after Fitch on Nov. 9 downgraded the company’s long-term foreign-currency issuer default rating, senior unsecured rating, and $5 billion MTN program and outstanding senior bonds' ratings to 'BBB-' from 'BBB', citing unexpectedly large cash outflows to its immediate holding company (Bidco) in H1’22 and insufficient public disclosures.

Read Reorg’s coverage of GLP HERE.


Week Ahead
Below is a list of events on the Reorg Asia Calendar for the next two weeks: