Highlights:
- Zhenro’s affiliated shares plunged over 70% on a single day. Afterwards, there was a rumour that Zhenro’s controlling shareholder, Mr. Ou Zongrong, lost the willingness to repay the debts. It claimed that Zhenro would not redeem the perpetual bond in March 2022, and they plan to undergo a debt restructuring on Zhenro Properties.
- Although Zhenro officially announced that it has the plan of redeeming the perpetual bond in March, they proposed a consent solicitation to waive the redemption of perpetual bond, due to the liquidity problem.
- The USD bonds are traded at a low level of around USD 15 to 25 level, which should factor in high default risk and known negative news.
A rumour claimed that Zhenro’s controlling shareholder, Mr. Ou Zongrong, lose the willingness to repay
On 11 February, Zhenro Properties and Zhenro Services shares plunged over 70%, due to forced selling of shares by the controlling shareholder, Mr. Ou Zongrong. Meanwhile, there was a rumour that after the forced selling, he lost the willingness to repay. It claimed that Zhenro would not redeem the perpetual bond, which the company promised in early January to redeem in March, and they plan to undergo a debt restructuring on Zhenro Properties.
On the same day, Zhenro officially announced that it has the plan of redeeming the perpetual bond in March, and clarified the above news report was untrue. The company also does not have any difficulty in business operation.
However, the market does not believe Zhenro’s official response. Zhenro USD bonds (including the bond due in April 2022, and the above-mentioned perpetual bond, with a principal amount of USD 200 million and USD 220 million respectively) crashed to around USD 15 to 25 level, implying a very high default risk on Zhenro.
Under the confidence crisis, Zhenro would have difficulty generating cash flows from sales
Zhenro’s monthly total contracted sales in January was RMB 7.9 billion, which decreased by 29.4% YoY. The decline rate was less than its peers of around -40%.
However, for the developers that have faced similar distressed situations before, such as Sinic, Kaisa and Shimao, after a piece of significantly bad news spread out in the market, their monthly contracted sales would decline by 70% YoY or more. We believe that Zhenro might face a similar situation, so it might have difficulty generating cash flow from property sales.
Triggered by the negative news and the confidence crisis, according to The Economic Observer, some financial institutions have already suspended financing for Zhenro’s project subsidiaries. This might have a material impact on its liquidity.
The company decided to propose a consent solicitation to waive the redemption of perpetual bond
In this case, in the evening of 18 February, Zhenro Properties announced that “its existing internal resources may be insufficient to address its upcoming debt maturities in March 2022”, including the redemption of the perpetual bond. Accordingly, the company proposed a consent solicitation to seek bondholders’ approval on waiving and forgiving any default against the company due to not redeeming the perpetual bond.
There are a few adjustments mentioned in the consent solicitation, including deleting the coupon rate reset event on 25 January due to not redeeming the perpetual bond (In order words, the coupon rate will not be reset). Even if the bond’s coupon rate is calculated at the initial rate in the future (until 6 March 2023), this will not trigger a default.
Apart from that, the terms about the first redemption date and Change of Control would be modified. Because the perpetual bond does not involve any Change of Control Put, we expect this would not have a material impact on bondholders.
If the consent solicitation is passed and approved by major bondholders, Zhenro would pay a 1% consent fee and 0.75% step-up fee based on the bond par value for those bondholders who vote for the proposal before the deadline (11 March).
Taking account into Zhenro’s current liquidity situation and the cases of how other developers manage their debts, we believe that it is more reasonable for perpetual bondholders to agree Zhenro’s proposal.
Last but not least, it is highlighted that even if the controlling shareholder’s willingness is low, Zhenro takes the action proactively. This might reflect the management team led by the company’s chairman and CEO, Huang Xianzhi, might still have some willingness to repay.
The USD bonds are traded at a low level of around USD 15 to USD 25, which should have factored in the high default risk and the known negative news. Hence, it might be less meaningful for investors to sell the bonds at this point.
Related Risks
Investors have to pay attention that for most perpetual bonds, not paying a coupon would not trigger a default, including this Zhenro’s perpetual bond.
It is hard to estimate the controlling shareholder’s willingness to repay. If Zhenro follows suit of what Sinic did by letting its bonds default or even adopting a “lying flat” (do nothing at all) strategy, the bond prices could drop further.
As of now, the controlling shareholder, Mr. Ou Zongrong and his family, still owns around 54.7% stake of Zhenro through their private subsidiary. If their controlling right is below 51% (which could be caused by disposal or forced selling of their shares), this will trigger the Change of Control Put of partial loans and bonds. These loans and bonds will become immediately due and payable, and give rise to a huge repayment pressure on the company.
Almost all assets of Zhenro are in the onshore market. Once Zhenro goes into defaults, the recovery value of USD bonds tends to be low.
Conclusion
Zhenro’s affiliated shares plunged over 70% on a single day. Afterwards, there was a rumour that Zhenro’s controlling shareholder, Mr. Ou Zongrong, lost the willingness to repay the debts. It claimed that Zhenro would not redeem the perpetual bond in March 2022, and they plan to undergo a debt restructuring on Zhenro Properties.
Although Zhenro officially announced that it has the plan of redeeming the perpetual bond in March, they proposed a consent solicitation to waive the redemption of perpetual bond, due to the liquidity problem.
The USD bonds are traded at a low level of around USD 15 to 25 level, which should factor in high default risk and known negative news.
Declaration: For or specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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