On 3 April, E-House announced a new restructuring plan to settle the outstanding offshore debts (including two USD bonds with a total of around USD 600 million and one convertible bond with approximately HKD 1.03 billion).
In the investor call, E-House’s management said that although creditors have approved the previous restructuring plan, the company was unable to deliver the upfront payment (6% principal plus accrued interest) as a result of a worse-than-expected capital chain condition. Thus, the company has to abort the plan and re-discuss an alternative solution.
Instead of rolling over the debts, E-House will convert the debts into shares in this latest proposal. The company will convince its existing shareholders to participate in a rights issue, which is expected to raise HKD 480 million (underwritten by Zhou Xin, the largest shareholder and the Chairman of the company). The company will use these funds to repay 6% of the accrued claims (offshore debts’ principal and accrued interest as of 30 June 2023).
After that, E-House will convert all of the remaining USD bondholders’ claims into equity ownership in a company (“Creditor SPV”), which it will indirectly hold the businesses of CRIC, Tmall Home and Leju.
E-House’s bondholders can participate in the restructuring support agreement from 11 April to 28 April. The consenting holders who have participated and also voted in favor of the plan at the scheme meeting can receive an instruction fee equal to 0.25% of the principal and accrued interest of the bonds.
As it is not an exchange offer but a restructuring plan through the Hong Kong and Cayman courts, it requires 75% approval to pass and then should be binding on all bondholders.
The Restructuring Plan
From our understanding, E-House currently owns 100% of the real estate agency business (Fangyou) and the real estate data platform (CRIC), and 70% of TM Home (Alibaba owns the remaining 30%). TM Home holds the business of Tmall Home and 56% stake in the US-listed Leju (Stock Code: LEJU.US).
In this restructuring plan, E-House will cease the major control of CRIC, Tmall Home and Leju, leaving only the traditional real estate agency business. Given that E-House is a light-asset company, the management said that in view of the special nature of this restructuring, they could only use the equity of core businesses to repay the debts.
Apart from the two USD bonds, Alibaba is currently holding the convertible bond. After negotiations with Alibaba, the two parties reached a consensus to transfer CRIC to TM Home, and then adjust the control of TM Home by issuing new shares, allowing the Creditor SPV to become its largest shareholder. After that, TM Home will be renamed into Tianji Home. Below is the equity structure upon completion of the restructuring (see Chart 1).
Chart 1: Equity Structure after Restructuring
According to the chart above, Creditor SPV (USD bondholders) and Alibaba (holder of convertible bond) will own 54.2% and 10.8% stakes in Tianji Home respectively, while E-House retains 20% stakes in Tianji Home for credit enhancement of onshore debts repayment. In addition, Tianji Home’s management will own the remaining 15% stakes as an incentive to improve the valuation of the company.
As Creditor SPV is a private company, how can creditors monetize their stakes? E-House pointed out that they will undertake all reasonable efforts to procure a sale of not less than 65% of Tianji Home’s shares to any investor, on or before 31 August 2024 (which is also the last day of the exclusive partnership agreement between Tianji Home and Tmall’s online real estate platform). Creditors can recommend an investor as well, given that each transaction must be approved by creditors’ shareholder meeting.
A third party hired by E-House estimated that the assessed value of CRIC is approximately RMB 1.37 billion, and the assessed value of Tmall Home and the stakes in Leju is approximately RMB 1.86 billion, combining around 65% of the principal amount of offshore debts.
Commentary
E-House’s restructuring plan approved last year is dead in the water, reflecting that the cash flows of the real estate agency business are below expectations amid the debt woes for many developers.
This time, E-House also offers 6% upfront payment, but the funds will come from the rights issue. In return, shareholders can write-off all the E-House’s existing debts, but end up giving away the major control of CRIC, Leju and Tmall Home, and only retaining the real estate agency business.
From Alibaba’s perspective, they will exchange the existing 30% stakes in TM Home and the HKD 1.03 billion convertible bond into the 10.8% stakes in the new Tianji Home, and also continue to offer the exclusive partnership for Tmall’s online real estate platform.
For USD bondholders, a principal write-down is inevitable in this proposal, and the developments of CRIC, Tmall Home and Leju will become the keys for recovery value. One of the risks associated is that the value of Tmall Home is based on the willingness of Tmall online platform to continue the partnership. If Alibaba chooses to terminate the exclusive agreement in August next year, it will significantly affect the value of the shares held by the creditors.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in EHOUSE 7.625% 18Apr2022 Corp (USD), and the analyst who produced this report holds a NIL position in the abovementioned securities.
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