Country Garden’s Proposed Restructuring Plan—Lacking Sincerity

Highlights:

• Regarding Country Garden’s proposed restructuring plan, bondholders could consider taking corresponding actions—supporting the restructuring or directly selling the bonds.

• Bondholders could consider joining the Restructuring Support Agreement (RSA) as soon as possible to receive a consent fee (0.1%) when the restructuring is effective and opt for a combination of Options 2, 3 and 5, which we believe are relatively attractive.

• Bondholders may also consider selling their bonds (current price: $9) as a potential option. Given the clear preferential treatment for the controlling shareholder and the limited influence of normal creditors in overturning the restructuring plan, selling bonds is likely preferable to holding the bonds and voting against the restructuring. Additionally, selling bonds offers greater certainty of recovery value compared to Option 1.

On 11 April, 2025, Country Garden announced its proposed restructuring plan. This restructuring focuses primarily on handling the Group’s offshore debt at the group level, excluding the debts of subsidiaries (in mainland China, Malaysia, and Thailand).

Country Garden stated that it has secured the signatures of a creditor group holding approximately 30% of the total principal amount of offshore bonds for this restructuring plan. The group is inviting other offshore creditors to join the RSA and indicated that it is close to reaching an agreement with certain members of the bank syndicate group.

Creditors who participate and hold until the record date will be eligible to receive an early consent fee or a general consent fee. The early consent fee is 0.1% of the claim amount, with a deadline of May 9, 2025, while the general consent fee is 0.05% of the claim amount, with a deadline of May 23, 2025. The consent fee will be paid in the form of Mandatory Convertible Bonds A.

The plan requires approval from 75% of creditors to pass. As the plan is a court-sanctioned restructuring scheme rather than an exchange offer, it will be binding on all involved creditors if approved. Due to the extensive content of the announcement, this article will only summarize key details, and some specifics may not be fully covered.

(The following content is for reference only. All details are subject to the original announcement.)

Scope of the Restructuring Plan

The restructuring plan covers two categories of debt: Class I Debt (three syndicated loans with an outstanding principal of approximately USD 3.6 billion) and Class II Debt (USD bonds, convertible bonds and one bilateral loan, with a total outstanding principal of approximately USD 10.5 billion, see Table 1). The total outstanding principal amounts to approximately USD 14.1 billion.

The claim amount for creditors is equivalent to the outstanding principal plus accrued and defaulted interest (as of 30 September, 2024), with subsequent accrued and defaulted interest to be waived.

As Class I Debt consists of asset-secured loans, it will receive a compensation arrangement of USD 178 million from syndicated credit enhancements (approximately 5% of Class I Debt’s outstanding principal). Part of this will be paid in cash upfront on the restructuring effective date, with the remainder repaid in the form of loans. The remaining claim amount for Class I Debt (after deducting the compensation arrangement) will be settled in the same manner as Class II Debt claims.

Table 1: Country Garden’s Class II Debt

Restructuring Plan

The plan includes five options: (1) Cash Tender Offer, (2) Mandatory Convertible Bonds A, (3) Mandatory Convertible Bonds A and Medium-Term Debt Instruments, (4) Mandatory Convertible Bonds B and Long-Term Debt Instruments and (5) Ultra-Long-Term Debt Instruments. Investors could choose to receive these debt instruments in the form of bonds or loans and in USD or RMB. Additionally, investors are free to allocate part or all of their principal to one or more of the above options.

Notably, the reference date for the restructuring plan is 30 June 2025. Even if the restructuring effective date is later than the reference date, the newly issued debt instruments will still calculate their terms from the reference date, which could differ significantly from other companies’ restructuring plans.

Table 2: Restructuring Plan Options

Table 3: Key Terms of Medium-Term, Long-Term and Ultra-Long-Term Debt Instruments (Option 3, 4 and 5)

Table 4: Mandatory Redemption Schedule of Medium-Term Debt Instruments

Table 5: Key Terms of Mandatory Convertible Bonds A and Mandatory Convertible Bonds B

Table 6: Issuer Call of Mandatory Convertible Bonds A

Notably, the controlling shareholder, Mr. Yang Guoqiang family, will convert his USD 1.15 billion shareholder loan into warrants and a 60% equity stake in the Malaysia Forest City project. Of this, USD 50 million of the shareholder loan will be treated as consideration for transferring the 60% equity stake in the Malaysia Forest City project, with the remainder converted into warrants at HKD 0.6 per share (issuance equivalent to remaining shareholder loan divided by HKD 0.6 per share). The controlling shareholder could exercise these warrants to convert into shares at any time thereafter (unlike the normal warrants, the controlling shareholder is not required to pay cash to exercise). Table 7 summarizes the expected dilution effects post-restructuring.

Table 7: Expected Dilution Effects Post-Restructuring

Short Commentary on the Restructuring Plan

Given the ongoing lack of recovery in the Chinese property sector, the offshore assets and projects have become critical to the recovery value after the offshore debt restructuring. As Country Garden has not yet disclosed specific details on credit enhancement measures or asset packages, it is challenging to conduct a detailed analysis.

The only clear observation is that the overall plan is tilted in favor of the controlling shareholder. The controlling shareholder can convert their shareholder loan into shares at a significantly lower subscription price (HKD 0.6 per share, far below the HKD 2.6 per share for Mandatory Convertible Bonds A) and directly exchange part of the loan for a 60% equity stake in the Malaysia Forest City project. This reflects clear preferential treatment for the controlling shareholder, which is unfair to other creditors. The so-called “controlling shareholder support” merely involves incorporating their existing shareholder loan into the restructuring plan without injecting new funds, demonstrating a lack of sincerity.

Regarding the quality of the options, here are our comments:

• Option 1: Given that the current bond price (around $9) is close to the maximum bid price of Option 1, bondholders may consider selling in the open market to avoid the uncertainty of the reverse Dutch auction. Additionally, Option 1 creditors face at least a 90% or greater principal haircut, making it less attractive overall.
• Option 2: The conversion price of Mandatory Convertible Bonds A is not excessively high. Based on the current share price (HKD 0.42 per share), this could represent a recovery of approximately 16% of the claim amount, though actual returns are highly uncertain. If the share price remains at current levels post-restructuring, this option has certain attractiveness.
• Option 3: This option combines Mandatory Convertible Bonds A and Medium-Term Debt Instruments, both of which are relatively attractive. The former, identical to Option 2, allows creditors to convert principal into shares immediately, recovering some principal. The latter has the best repayment priority among the three debt instruments, theoretically offering the highest likelihood of full repayment, and includes a 2% upfront cash repayment. Thus, Option 3 has certain attractiveness.
• Option 4: Option 4 lacks advantages. The Mandatory Convertible Bonds B have a high conversion price of HKD 10 per share, implying an expected recovery of only about 1.5% of the claim amount (= current price HKD 0.42 / conversion price HKD 10 * 35% of claim amount). The Long-Term Debt Instruments, accounting for 65% of the claim amount, also rank lower in repayment priority compared to Medium-Term Debt Instruments, so investors could prioritize other options.
• Option 5: This is the only option without direct or indirect principal haircuts and does not involve converting principal into shares. Therefore, the Ultra-Long-Term Debt Instruments have higher attractiveness:
• If the Group significantly improves its debt repayment capacity due to an unexpectedly strong industry recovery, the full principal recovery is possible.
• If the Group remains in distress and defaults again, creditors choosing this option could have greater bargaining power in a second round of debt restructuring.
• However, investors should note that this option is highly likely to be oversubscribed (maximum acceptance is only 10% of total claim amounts). In such cases, the excess will be mandatorily allocated to Option 4, which we consider the least attractive. Thus, creditors might need to consider other options (e.g., Options 2 or 3) to diversify this risk.

In summary, bondholders could consider the following actions:

• Support the Restructuring: Bondholders could consider joining the RSA as soon as possible to receive a consent fee (0.1%) when the restructuring is effective and opt for a combination of Options 2, 3 and 5, which we believe are relatively attractive.

• Sell Bonds: Bondholders could also view selling bonds (current price: $9) as a potential option. Given the clear preferential treatment for the controlling shareholder and the limited influence of normal creditors in overturning the restructuring plan, selling bonds is likely preferable to holding the bonds and voting against the restructuring. Additionally, selling bonds offers greater certainty of recovery value compared to Option 1.