On 2 May, a winding-up order was made by the Hong Kong Court against Jiayuan International (“Jiayuan”). This means that the company enters into liquidation procedures. The Official Receiver was appointed as the provisional liquidator of the company. Hong Kong Official Receiver's Office (“ORO”) held the first creditors’ meeting on 2 June to elect the official liquidator.
The winding-up petition could date back to 6 September 2022. The petitioner, Yeung Man, filed a winding-up petition against the company. Yeung Man holds the USD bond due on 29 October 2022, with a principal amount of USD 14.5 million. This USD bond arouse from a private exchange offer between the holders of the USD bond due on 2 May 2022 and the company. Similar to other Chinese developers’ winding-up petition, Jiayuan’s case extended four times in the past eight months.
At the end of August 2022, Jiayuan launched an exchange offer, together with a restructuring support agreement, for the holders of six USD bonds (which include the 29 October 2022 USD bond), with an aggregate principal amount of around USD 1.17 billion. (Related Article: Jiayuan International—An Acceptable Exchange Offer). Over the past eight months, the company extended the expiration deadline of the exchange offer and restructuring support agreement, in order to get more support from the USD bondholders. On 26 April, the company announced that it terminated the exchange offer and intended to proceed with the restructuring scheme.
(The following is for reference only. All details are subject to the Court’s Judgments. It involves subjective interpretation. Please seek independent legal or other professional advice if you have any doubt about how the law applies to you.)
Referring to the Hong Kong Court's judgment (Case No. HCCW 317/2022), Jiayuan requested the court to allow some time for it to carry out a restructuring effort, in order to turn around its financial predicament. However, the judge, Linda Chan, pointed out that if the company opposed the winding-up order, it had to prove to the court that it prepared a concrete restructuring proposal or a scheme of the arrangement, and such a proposal or scheme has the support of the requisite majorities of creditors.
Besides the defaults on USD bonds, Jiayuan also owes HSBC a loan of USD 191 million and a payable guaranteed by the company, as well as Oaktree Capital’s debt of about USD 36.12 million. Such the two creditors supported the company’s liquidation, saying that there was no evidence that the company had the means or measures to pay down the debts. They requested the judge to issue a winding-up order immediately. Together with the other supporting creditors (in total 10 supporting creditors), they hold around USD 300 million to 350 million in total debt claims. (See Table 1)
Table 1: A List of Creditors Supporting Company’s Liquidation or Opposing Company’s Liquidation
| Creditor Name | Total Alleged Debt Amount | |
| Support for Company’s Liquidation | HSBC Oaktree Capital (OCM APDO Gene Investments) Rich Resources Seventy Eight Six private bondholders |
Undisclosed (Estimated to be around USD 300 million to 350 million, according to
Jiayuan) |
| Opposition to Company’s Liquidation | CCB International
Overseas Broad Huqiu Investment Valuable Era Ltd |
Around USD 110 million |
| Considered as not showing their stances | The USD bondholders who agree with the exchange offer and restructuring support agreement | Around
USD 810 million* (account for 62% of six bond principal amount) |
| Other Creditors | Undisclosed | |
| Source: Court’s Judgments, Company Announcements, iFAST
compilations Data as of 2 May 2023 *Data as of 6 March 2023 |
||
The representative of Jiayuan pointed out that USD bondholders, with a debt amount of around USD 810 million, agreed to the exchange offer and the restructuring support agreement. The company also proposed to arrange an extension plan to the six private bondholders (who support the liquidation). Three creditors, who hold around USD 108.5 million debt, opposed to the company’s liquidation. These reflect the major creditors oppose to the company’s liquidation.
Regrettably, the judge did not accept the arguments of Jiayuan's representative. She questioned that Jiayuan's so-called “Scheme” is not formulated, but only an idea put forward by the company.
The judge believed that USD bondholders only indicated their support or acceptance of the exchange offer, instead of supporting Jiayuan’s restructuring. They did not show their stances regarding the company’s liquidation. Meanwhile, Jiayuan did not have a restructuring plan to settle the class of the supporting creditors (HSBC, Oaktree Capital, Rich Resources and Seventy Eight). Only one of the six private bondholders accepted the extension plan, proposed by Jiayuan in April. Besides, the three opposing creditors did not point out what “intended debt restructuring” is. Thus, the judge issued a winding-up order against Jiayuan.
In fact, those USD bondholders who were considered as not showing their stances should agree with Jiayuan to undergo debt restructuring instead of the company’s liquidation (otherwise, they did not have to agree with the restructuring support agreement). These USD bondholders are the major offshore debtholders. As such, this company’s liquidation was unexpected by the most creditors.
It was reported that the pro-Jiayuan party filed an appeal to the Hong Kong Court in late May, in an attempt to overturn the company's winding-up order. We believe they have some chance of success, since the judge at that time treated the USD bondholders as not showing their stances.
However, considering that the costs of litigation and legal fees might be funded by a third party (the provisional liquidator already control Jiayuan’s account). The pro-Jiayuan party might shrink due to the financial issue. In addition, Jiayuan’s scheme of arrangement was proposed before the bond defaults. It is true that the scheme does not cover the supporting creditors. Therefore, there is a high degree of uncertainty whether the judgement can be overturned.
In addition, on the eve of the first meeting of creditors, ORO rejected the creditor status of USD bondholders, since the bond trustee, Citibank, did not submit a valuation of the collateral of the bond (the collateral is the company shares of Jiayuan Investment Management Limited). Citibank claimed that it lacked information to value the collateral and therefore did not perform the valuation and did not file Proof of Debt with ORO on behalf of the USD bondholders.
As a result, those bondholders who intended to be present at the meeting to elect the official liquidator were not eligible to vote for the official liquidator at the first creditors’ meeting. While ORO eventually allowed those bondholders to vote after they argued their case, but ORO did not specify whether their votes were valid or not. ORO only mentioned that the Court will decide it.
The practices of ORO and Citibank created a certain degree of chaos. However, regardless of considering the vote of those USD bondholders, Deloitte should become the official liquidator in Jiayuan’s case.
USD bondholders are now in a passive position. From our experience, the company’s liquidation takes at least a few years or even longer. During the time, distributions from the liquidation proceeds might be received in different tranches.
Considering that Jiayuan’s asset quality is better than others defaulted developers and its debt structure is simpler, we believe that the ultimate recovery value will be much higher than the current bond prices. In addition, Jiayuan’s appeal might be successful and then Jiayuan might proceed with the initial restructuring plan of the USD bonds.
We will continue to keep track of the ongoing development from ORO and Citibank, and update the details.
Related Article:
Jiayuan International—An Acceptable Exchange Offer
Where to Go for Defaulted Developers? Debt Restructuring or Company Liquidation?
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