Chinese property developer Fantasia Holdings reached agreement with its offshore creditors on a plan to swap part of its liabilities for equity in the company, in a move that may help ease one of the biggest financial problems globally.
Since sector leader China Evergrande Group first indicated it might default in September 2021, a wave of developers, with US$135bn of offshore bonds outstanding between them, have frozen payments on those instruments.
So far negotiations on how to fix the problem have been slow, with most developers preferring to simply extend the maturities of these liabilities. Now Fantasia has broken the mould with one of the first debt-for-equity swaps of any size in the Chinese market.
Offshore creditors have agreed to swap US$1.3bn, or a third, of their US$4bn debt claims for equity giving them a majority stake of 52.6% in the company. Founder "Baby" Zeng Jie alongside Gortune Alternative Fund Management and other investors will also put in US$200m of new money to give her a 45% holding in the equity. (See China Debt Capital Markets.)
The remaining debt will be extended by up to six and a half years, giving Fantasia more leeway to pay back this reduced amount. It said it hoped to generate cash of between Rmb40bn (US$5.9bn) to Rmb70bn from projects in this period and up to Rmb7bn from asset sales.
The negotiations were accelerated after a small debtholder brought winding-up petitions against the company last year. An ad hoc group of bondholders, holding 24.5% of the offshore bonds by value, suggested a debt-for-equity swap as an alternative way of warding off such threats.
A source close to the situation said the logic of the proposal was that the balance sheet needed to be shrunk to reflect the changed circumstances of the developer in the tougher property market since the beginning of the Covid pandemic.
By allowing the company to swap part of the debt into equity, creditors hope Fantasia will be able to pay off the rest of the debt, preventing another default in the near term. No cash payments are due on the restructured notes for two years. The deal will be carried out via a scheme of arrangement.
The restructuring plan was published on January 13, just three days before the hearing of one winding-up petition against the company in Hong Kong. A separate hearing in the Cayman Islands is scheduled for February 27. Houlihan Lokey advised the company.
Fantasia’s shares, which last traded on April 1 last year, will be consolidated following the swap, which will see a creditor group representative join the board of the company.
Martin Gudgeon, partner at PJT Partners, which has been advising the ad hoc group, said: “We proposed a different approach to right-size the capital structure for the business. This is now being looked at by other real estate companies.”
Future use?
Other market participants seemed unclear whether other distressed property developers would follow Fantasia’s lead, since Chinese investors remain conservative and reluctant to take a haircut on debt positions.
“It depends on the creditor type. Some international investors are indifferent about a haircut if there’s a plan rolling out as soon as possible, but Chinese investors don’t seem to be prepared for it,” said Jason Ho, a senior managing director at FTI Consulting.
Fantasia said in a post on WeChat that the plan had gained support from international investors.
“The announcement of the deal has given a shot of adrenaline to the bonds' prices,” said Jamie McLaughlan, senior managing director at PJT.
Fantasia's offshore notes rose around six points on January 16.
Another restructuring banker away from the situation said debt-for-equity swaps have always been very difficult to negotiate between companies and creditors.
“If the company isn’t short of money, they’ll not go through [with] the swap,” he said. “It will dilute the company’s shares and not every creditor wants to hold companies’ stocks. A lot of those defaulted developers’ stocks are not worth much money.”
The banker said that the conversion price is one of the main challenges. “Usually if the debt-to-equity swap gets creditors’ consent, the conversion price is in their favour, which means it’s a level that companies won’t like,” he said.
Swaps can also be beneficial to investors as they allow distressed debt investors to cash out part of their holdings. Ho said there were other developers considering swaps for restructuring, but for companies that have listed subsidiaries, there was discussion around which stocks to pick. Investors prefer liquid stocks with strong underlying value.
Kaisa Group Holdings is also considering a debt-for-equity swap, according to an investor. And in an update on January 16, Evergrande said it was “actively” discussing restructuring with offshore creditors, who hold US$22.7bn of debt. That came as PwC quit as auditor to the company, which in total has US$300bn of liabilities.
One restructuring adviser said the timing of the deal just ahead of China’s new year holiday was significant. “This seems to be a testing of the water. The authorities have given implicit backing to this solution,” the adviser said.
According to Refinitiv data, Chinese property developers have US$141bn of offshore debt due to mature this year.
“The ability for creative dealmaking is here, but the market has been a bit stuck until someone breaks the mould,” said another restructuring adviser. “The first debt-for-equity swap will change that. The key now is to get one of the big deals overseen by the government completed.”