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Close shave

9 March 2015 By Peter Thal Larsen

Kaisa’s haircut for offshore bondholders is a bad omen for China’s property sector. The troubled developer’s ballooning debt and evaporating cash leaves creditors with little choice but to accept a restructuring that proposes to lower interest payments and extend maturities by five years on $2.3 billion of offshore bonds. The bigger question for investors is whether Kaisa is an isolated case.

There are three big warnings signs in the proposal unveiled late on March 8. The first is disappearing cash. Kaisa had 10.9 billion yuan on its balance sheet ($1.74 billion), at the end of June last year. By the beginning of March this had shrunk to 1.9 billion yuan. The company blames the decision by mainland authorities to freeze assets and block new sales, presumably due to an anti-corruption investigation. Even so, that doesn’t really explain why reserves have depleted so quickly.

Kaisa’s exploding debt is even more troubling. At the end of December, the company owed 65 billion yuan – more than double the reported figure at the end of June. Much of the increase seems to arise from joint venture projects where Kaisa sold equity stakes to trust funds with an agreement to buy them back. These sales may have allowed the company to claim that it did not control the ventures – and was therefore not on the hook for the associated debt. The fact that it is now recognising those borrowings casts doubt on the accuracy of previous financial statements.

The third troubling indicator is Kaisa’s assessment of what would happen if the company were to be wound up. An analysis by Deloitte suggests offshore creditors would receive just 2.4 cents for every dollar they are owed. Though Kaisa has an interest in making the situation look bleak, it’s a reminder of how much foreign borrowers stand to lose when Chinese companies get into trouble.

Bondholders may conclude that Kaisa’s plan – part of a rescue by rival developer Sunac – is the best on offer. However, the haircut could have broader repercussions. Chinese property companies have issued offshore bonds worth almost $34 billion since the beginning of 2013, according to Thomson Reuters. Investors must now ask whether Kaisa’s problems are unique – or a portent of more trouble to come.



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