Chinese Property Developers Tighten Debt Restructuring Terms as Sector Recovery Falters
Debt Restructuring Challenges for Offshore Creditors
As Chinese property developers face the need to restructure their massive debts, offshore creditors are anticipated to face further difficulties. The worsening outlook for the country’s real estate sector is expected to lead to tighter terms for debt revamp. According to JPMorgan, since 2021, 40% of Chinese home sales developers have defaulted on their debt obligations. These defaulted companies, which are mostly private, have issued approximately $110 billion worth of high-yield offshore bonds.
Despite the implementation of supportive policies by Beijing, home sales continue to show little signs of improvement. This could result in debt restructuring terms being much worse than initially anticipated. Sunac China recently became the first property developer to complete the debt revamp process, while Country Garden, China’s largest private property developer, is expected to begin negotiations soon.
Worsening Environment Impacts Restructuring Offers
A few developers, including Shimao Group and CIFI Holdings, have recently reduced their offers to offshore creditors due to the deteriorating environment. These revised restructuring offers could involve haircuts of up to 70% to 80%, compared to the previously proposed plans with no haircuts. The worsening home sales and weaker yuan currency have significantly influenced these decisions.
A senior executive of a developer in restructuring talks stated, “Compared to ‘Sunac time’, the environment is very different, hence the terms have to be very different.” They also emphasized that Sunac’s success cannot be used as a template since it may need to restructure again in the future if bad sales continue.
Challenges in Negotiations and Creditors’ Concerns
Developers, advisers, and bondholders are facing challenges in negotiations as home sales from June to September are worse than initially anticipated. As a result, many firms are lowering their terms, but it will take time to convince creditors. The declining bond prices of Country Garden, CIFI, and Shimao indicate low recovery rates for bondholders.
While liquidation is an undesirable option for creditors, it remains a risk. Kaisa Group has warned that creditors would receive less than 5% of their money back if the company is forced into liquidation. Developers are trying to avoid this scenario and are seeking alternative solutions.
Outlook for the Property Sector
Chinese policymakers have implemented measures to revive the property sector, but these efforts are yet to yield significant results. The average daily home sales during the recent Golden Week holiday were down 17% compared to the previous year. The lack of proactive government intervention and financial stability concerns may result in further challenges for bondholders.
Despite initial expectations that Sunac’s restructuring terms would serve as a template for other developers, the current diminishing hopes for a sector recovery are challenging these assumptions. Restoring confidence in the sector will require more than the successful restructuring of individual companies. It remains to be seen how the sector will navigate the ongoing debt crisis and revive its prospects.
