E-House’s annual result and bond exchange offer

In our last update, we mentioned that E-House’s exchange offer to extend the maturity of their USD bonds was already in the works. On 31 March, the company released their 2021 unaudited annual results, and officially announced of the exchange offer. 

A Loss of 9.4 Billion Yuan due to Huge Loss Provision

In line with its previous profit warning, the company recorded a loss of 9.37 billion yuan in 2021, with around 6.67 billion yuan from expected loss allowance on receivables, and a 0.59 billion yuan impairment loss recognized on non-current assets.

Although E-House’s revenue increased 9.8% YoY to 8.05 billion yuan, it is mainly due to the increase in revenue derived from digital marketing services upon the acquisition of Leju and the consolidation of their balance sheets in November 2020. Digging deeper, the revenue from real estate agency services in the primary market, real estate brokerage network services and real estate data & consulting services dropped by 38.3%, 18.1% and 7.3% YoY respectively. If it seemed liked E-House’s results in the first half presented a significant growth, then the situation in second half was literally disastrous (see Table 1).

Upon the reduction in size of receivables, the company’s total equity decreased by 74%, with current assets also shrinking in half. Bank balances and cash fell to 3.31 billion yuan as well.

Table 1: E-House’s Operating and Assets Condition

If we deduct the 0.25 billion USD cash held by Leju (around 1.59 billion yuan), the liquidity in the company’s books will be slightly lower than the 300 million USD bond due in April.

Since E-House wishes to continue operating, and some of their cash is tied up with key subsidiaries such as TM Home and CRIC, the company has chosen to retain its existing capital and propose an exchange offer and consent solicitation to extend the maturity of its USD bonds.

Details of Exchange Offer

The exchange offer and consent solicitation is quite complicated and also includes a restructuring support agreement via the Cayman Scheme. Here is a brief summary of the key terms:

• Exchange offer is applicable to the two USD bonds due in April 2022 and June 2023 simultaneously (the two bonds will be consolidated into one single tranche of new bond).

• New maturity date is expected to be on 14 April 2025.

• Voting deadline for the exchange offer is 11 April 2022.

• The minimum acceptance rate is 90% in terms of outstanding principal amount of each of the 2022 and 2023 bonds; however, the company can choose to implement the Cayman scheme via the Court if they manage to obtain 75% approval (the terms under the scheme are generally identical to the exchange offer, the differences are the extra consent fee and that the scheme will be binding on all bondholders).

• CRIC will become a subsidiary guarantor of the new bond. E-House will also seek approval from Alibaba for TM Home to become a subsidiary guarantor within six months from the date of the new bond’s issuance.

• If E-House sells off its equity shares of its key subsidiaries (including Leju, TM Home and CRIC), at least 50% of the net consideration derived from the sale shall be used to repay the new bond.

• Some amendments to existing terms regarding subsidiary guarantees and default clauses.

• The minimum denomination of the new bond is 150,000 USD.

If the exchange offer is passed successfully, bondholders who vote in favour will receive:

• Principal amount which is equivalent to 6% of the bond’s face value, and the bond’s accrued interest (2022 and 2023 bondholders can receive upfront cash of approximately 9.71% and 8.60% respectively).

• A new bond which is equivalent to 94% of the bond’s face value.

• The new bond has a coupon rate of 8%. The coupon will be paid semi-annually in cash, except for the first year, where the company may choose to use payment-in-kind to pay not more than 6% of the coupon (payment-in-kind means paying interest by giving additional bonds, and therefore the total bond principal held by the investor will increase)

• The new bond will repay 10%, 6%, 8% and 10% of its principal at Year 1.0, Year 1.5, Year 2.0 and Year 2.5 respectively. The remaining balance will be repaid on the maturity date (effective duration of the bond will be less than 2.3 years).

• If the company chooses to implement the Cayman scheme, bondholders who vote in favour of the scheme can obtain an extra 1% consent fee.

Commentary

The exchange offer extends the 2022 bond’s maturity by three years, which means the bondholders will lose their priority in maturity against the 2023 bond. With reference to exchange offers from other Chinese developers, we think the extension period (even with the principal repayment schedule taken into account) is too long and will be more detrimental to holders of the 2022 bond. Holders of the 2023 bond should even have more incentive to accept the exchange offer as they can receive a portion of their principal earlier than expected.

Meanwhile, the exchange offer also mentions the 1.03 billion HKD convertible bond due in 2023, issued by E-House to Alibaba. The maturity date of this bond will not be extended and will in fact mature earlier than the new bond. Despite E-House’s proposal to add TM Home as a guarantor of the new bond, they have not obtained an assurance of the arrangement. As such, we believe Alibaba’s support is not adequate. If it turns out that TM Home will not be a guarantor, the credit enhancements of the new bond will not be strong enough, and the overall attractiveness is limited.

E-House currently has around 6.9 billion yuan of borrowings and 5.3 billion yuan of other liabilities. As a light-asset real estate agency, even excluding the intangible assets, the company should bet yet to reach a point of insolvency. However, under a liquidation process, the firm’s asset value will be significantly reduced, and the final recovery value of the bond could be lower than its face value and could even fall below 50%. Thus, investors have to decide whether they can accept this outcome; or provide the company with more time, with the hopes of a full recovery of principal and interests at maturity, and also receive an upfront cash of around 8-10% of the principal first.

If both the exchange offer and the Cayman scheme cannot be passed, the company will very likely enter a restructuring process after a bond default. At that time, creditors can either file a liquidation request or wait for the company to offer a restructuring plan. Investors have to understand that the process could be lengthy, and there is no guarantee that related assets will not be sold off or written down further. It also involves corporate governance supervision as the proceeds generated from asset sales may not be used in debt repayment.

Last but not least, bondholders who vote in favour will also simultaneously agree to the restructuring support agreement via the Cayman Scheme. As the exchange offer requires a minimum acceptance rate of 90% from holders of both 2022 and 2023 bonds, the possibility of it passing is quite low. Therefore, E-House may ultimately want to attain the 75% approval to launch the Cayman scheme. Under the Cayman scheme, all existing bondholders will be subjected to a mandatory bond exchange. Holders who vote in favour could receive an additional consent fee equivalent to 1% of the bond’s face value, and other terms under the scheme are generally identical to the exchange offer.

Currently, the April 2022 bond and June 2023 bond are trading between $20 and $30 level, with the outstanding amount at around USD 300 million each. If investors can wait, it may be a better choice to hold on given the current market price, regardless of accepting the exchange offer or not.