Tahoe Group Bond Default: Bondholders Should Look Beyond Traditional Restructuring
On July 8, after seeking three extensions, Tahoe Group published its response to an inquiry issued by the Shenzhen Stock Exchange in relation to the group’s 2020 annual report. The response provides some answers to the Tahoe Group liquidity and debt situation, but it is unknown whether the public’s concern over the unanswered progress of the group’s prospective restructuring can be relieved.
Tahoe Group, a Fujian-based PRC property developer, is deeply mired in financial crisis contributed by the PRC policy change. The group’s plan to introduce China Vanke as a white knight has not yet materialized as a result of a delay in the group’s debt restructuring process.
In the meantime, enforcement proceedings against the group have ramped up. Creditors have frozen equities controlled by Tahoe Group and its controller, and the group and its chairman Wang Qishan are also both listed on the List of Dishonest Persons Subject to Enforcement in the PRC. As the guarantor of its subsidiary Tahoe Group Global Co., Ltd, the group is facing a large-scale bond redemption and cross default at a size of over US $800 million for its dollar-denominated bonds alone.
As a standard clause in many US dollar-denominated indentures, individual bondholders are bound by a “no-action” clause prohibiting them from initiating proceedings against the issuers to enforce the note. Its purpose is to guard against superfluous suits taken without the bond trustee’s blessing. The indenture of the Tahoe Group’s bonds provides an exception, however, which lifts the no-action clause when the bond reached maturity. Individual bondholders are therefore entitled to commence enforcement actions after the maturity dates, allowing greater room for activist investors’ strategies.
In order for activist investors to maximize their return on investment, an opportunistic activist approach using offensive investigative tools may help uncover assets owned or controlled by the group and its decision makers. The starting point is to look at the corporate structure of Tahoe Group outside of the PRC. While the group has only a few offshore subsidiaries, including its main Hong Kong subsidiary Thaihot Group (Hong Kong) Co., Ltd and two subsidiaries in the BVI (including the issuer of the distressed bonds), aggrieved offshore bondholders often see themselves in a disadvantaged position as compared with onshore creditors. Indeed, the absence of leverage is often the cause of the loss of momentum in traditional restructuring, which results in a prolonged recovery.
Focusing on decision makers’ business and personal relationships may also provide value to investors, which is often overlooked. For example, looking at the recent activity of the group, attempts were made to create liquidity although its intention to acquire Tahoe Life Insurance, the insurance business in Hong Kong and Macau operated by its majority shareholder Tahoe Investment Group Co., Ltd, which is controlled by the group’s Chairman Wang was aborted. Tahoe Investment is also rumored to be looking to sell its healthcare service in the United States.
If strategies are devised to block a prospective sale, or even to unwind a completed sale, the distressed company may face unresolvable liquidity issues and its decision maker may also feel enormous pressure to negotiate with better terms. There may also be opportunities for investors to seize assets “in transit”, if a transaction was not properly conducted, hence allowing investors to obtain a quasi-security over the distressed company.
Devising a strategy with information on these relationship and personal ties could provide a new perspective for activist investors in two meaningful ways: First, it facilitates negotiation for a more favorable restructuring plan, which may in turn help bring capital injections from white knights and other potential co-investors; second, it builds on foundational enforcement procedures, which encourages favorable settlement or even provides security to unsecured creditors.
It is therefore vital for investors to keep a lookout for creative strategies in situations where traditional restructuring has proven to be ineffective.