Jiayuan International—An Acceptable Exchange Offer (Updated on 22 September)

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

• The minimum acceptance amount is 90% of the outstanding amount of each of the six bonds.

• There are some amendments to the default clauses.

• The coupons of the new bonds will be paid on the “Coupon Payment Date for New Bond” in Table 1. It will be divided into two tranches:

• From the issuance of new bonds until the end of the 12th month (September 2023), the new coupon rate is 9% per annum. The company will repay the coupon by payment in kind, which means the coupon earned will accrue to the principal of the new bonds and be repaid at maturity.

• Between the end of the 12th month of issuance and the maturity date, the new coupon rate is 7.5% per annum. The company will repay the coupon in cash. 

• If the tender offer is being passed, bondholders who have accepted the offer would have the following compensations:

• A new bond equivalent to 100% of the bond par value,

• An incentive fee equivalent to 0.25% of the bond par value, and

• A “Deferred Interest Consideration”, which is equivalent to one semi-annual interest cash payment of the old notes. 5%, 45%, 30% and 20% of the semi-annual interest will be payable within 6 months, 9 months, 12 months and 15 months respectively after the immediately preceding interest payment date or the upcoming interest payment date of the old notes. 

• Upon the sale of specified assets, Jiayuan would allocate half of the excess of the net consideration amount over RMB 100 million to repay the new USD bonds such as coupon and principal repayments, repurchases of bonds in the open market or/and tender offers to repurchase etc.

• The specified assets refer to the Enping Empire Resort and Spa Development (帝都溫泉山莊) project located in Enping (equity interest attributable to the Group: 90%) and Qingdao Lingshihuafu project (領世華府) (equity interest attributable to the Group: 63%).

• As of the end of June 2022, the Enping project has around 700,000 square meters of saleable gross floor area left. According to the information of Fang Holdings, the selling price of the project is around RMB 7,000 per square meters. The estimated saleable resource is around RMB 4.9 billion.

• As of the end of June 2022, the Qingdao project has around 336,700 square meters of saleable gross floor area left. According to the information of Fang Holdings, the selling price of the project is around RMB 50,000 per square meters. The estimated saleable resource is around RMB 16.8 billion. The total principal amount of bonds involved in the exchange offer is around RMB 9 billion.

• If the company successfully generate total contracted sales over RMB 15 billion in the first half of 2023, the company should redeem at least 10% of outstanding amounts of each bond through different means, including principal repayments, repurchases of bonds in the open market or/and tender offers to repurchase.
  

• In addition, the offer has clauses related to mandatory partial redemption of the new bonds, where the company will redeem at least 5%, 10% and 15% of the principal amount on the date of mandatory redemption in three tranches respectively, as mentioned in Table 1. In order words, bondholders should collect at least 30% of the principal amount six months before the maturity dates of new bonds.

• If the exchange offer is not being approved, Jiayuan can then take advantage of the Scheme of Arrangement proposal through the Court. Bondholders who vote in favour of the offer will be deemed to be equally in favour of the Scheme.

• Under this Scheme, if Jiayuan manages to obtain 75% or above approval of bondholders, all existing bondholders will be subjected to a mandatory bond exchange. Holders who vote in favour could receive an additional instructive fee equivalent to 0.25% of the bond par value (paid within 14 days after the Scheme becomes effective). Other terms under the scheme are generally similar to the exchange offer. But there might be small differences for the coupon payment dates, dates of Mandatory Redemption and the redemption amounts. 

In addition, Jiayuan also conducted consent solicitations for holders of two USD bonds–“First October 2022 Notes” and “July 2023 Notes”. Jiayuan seeks to amend some clauses and waive the cross-default clauses that have been triggered. The former one has been defaulted due to the holders’ exercise of their put option but Jiayuan failed to redeem the bond; the latter one has been defaulted due to unrepaid coupon.

The exchange offer and consent solicitation for bonds will be expired on 23 September. If the proposal is being passed, the company will issue new bonds on or about 30 September.

It is noticed that the exchange offer does not involve the USD 100 million convertible bond due in 2025 because the convertibles are issued under English Law while the bonds in the exchange offer are issued under New York Law. Therefore, Jiayuan cannot deal with these two types of bonds together. It is said that the company intends to seek maturity extension of the convertible bond as well, in case the existing bondholders have lost the maturity advantage upon such extension.

Short Commentary on the Exchange Offer

The details of the exchange offer are quite complicated. Jiayuan’s offer bases on companies who have previously extended bond maturity, including payment in kind for some coupons (R&F Properties), the provision of project assets for credit enhancement (Zhongliang Holdings), mandatory redemption on specified dates (Powerlong Real Estate) and a back-up proposal if the exchange offer is not being approved (E-House). At the same time, the company also drastically reduces the bond coupon to 9% and 7.5%, which is seemingly detrimental to bondholders.

However, we believe these moves to lower the coupon of the bonds and to allow payment of coupon in kind are still reasonable. In the case of Zhenro, Yuzhou, Shinsun, Yango and Jingrui, these Chinese real estate developers proposed an offer to extend the maturity but subsequently failed to repay the first coupons of their new bonds, resulting in bond defaults. It also defeated the purpose of the exchange offer. We believe that after the moves to lower the coupon of the bonds and to allow payment of coupon in kind, Jiayuan’s short-term liquidity pressure will be significantly relieved, which will provide some time buffer for the company to tackle its financial difficulties. It might be better for the company to fulfil its obligations in the future.

The offer also indirectly discloses that Jiayuan has a private bond, with a principal amount of USD 99.25 million due on 29 October. Fortunately, the company did not prioritize the repayment of this private bond. Instead, they settle the private bond together with the five public bonds by seeking a maturity extension of 2.25 years. It is fair to investors, and those investors who hold the bond with earlier maturities will not lose the maturity advantages after accepting the offer.

In the exchange offer, Jiayuan did not disclose its intention as to whether they will repay the outstanding old bonds or not. If investors insist on not accepting the exchange offer while the proposal is being approved, in theory, there will be a very low probability that the full principal and accrued interest will be repaid by the maturity date. However, in the past, most developers who extended their maturity on USD bonds chose to default on the holdouts of the old bonds and disregard those bonds. Investors might lose the entire principal amount and even unable to sell the bonds in the market. If investors neither accept the offer nor sell the bonds immediately, they should be aware of this kind of risk.

Besides, investors have to note the risk of a low sell-through rate of specified assets. These two projects are being sold on the market for a long period of time. Jiayuan might not be able to use the sales proceeds from these projects for repayment of debts.

Overall, while Jiayuan’s exchange offer is not top-notch, the company is willing to offer about 6% to 7% extra cash of the par value paid by installment (one semi-annual interest cash payment + incentive fee), mandatorily redeem at least 30% of bond principals starting from 2024 and put two major projects as a credit enhancement. This shows a certain degree of sincerity. It would be a better choice for investors to accept the offer.

Jiayuan’s bonds are traded from around $8 to $15, which sufficiently factored in the high uncertainty after the maturity extension.  Investors can pay attention to whether the company can pay the promised semi-annual cash payment on time, and whether it will repurchase the bonds in the open market after the sales recovery. This might lead to a large rebound in the bond prices.