Logan’s Proposed Restructuring Plan

As for priority notes (Table 3), the tenor is 6 years, with a coupon rate of 1.25% for the first two years and 3.75% for the remaining four years. The principal will be amortized starting from the third year. It is important to take note that the coupon will be paid in cash, and Logan Group has the right to defer the amortization and coupon payments from the third year to the fourth year. In such a case, the amortization and the coupon for the third year and the fourth year will be consolidated and paid in the fourth year.

In addition, priority notes’ accrued interest up to 31 December 2023 will be converted into mandatory convertible bonds, which have zero coupon and tenor of 1 year at a conversion price of HKD 9 per share.

Table 3: Priority Notes

Option 3: Mandatory convertible bonds

Creditors who choose Option 3 will convert every USD 100 principal of existing notes into mandatory convertible bonds with the accrued interest waived. The specification is shown below:

Table 4: Option 3 MCB 

Option 4: Long term note and mandatory convertible bonds

Creditors who choose Option 4 will convert every USD 100 principal of existing notes into USD 100 of long-term notes, with a tenor of 9 years. The principal amount equals the existing principal amount, minus the sum of the aggregate principal amount of all existing notes exchanged or converted under Options 1, 2, and 3 and the remaining portion of shareholder loans (around USD 946 million). The details are set out below:

Table 5: Long-term Notes

Credit Enhancement Measures

Logan Group provides credit enhancement measures for the priority notes under option 2 and long-term notes under option 4, including the use of onshore and offshore specified assets (Table 6) for the repayment and cash sweep. However, the details of onshore specified assets and the allocation of funds are not yet available to the public. On the other hand, Logan Group aims to liquidate some investment properties it owns after the effective date of the restructuring plan, to redeem and pay off onshore corporate bonds, while the surplus will be used to support the payment of offshore debt.

Table 6: Offshore Specific Assets 

Operation and Credit Highlights

As of 30 June 2023, Logan Group owns 101 property projects under development in over 30 cities in China. The contracted sales slumped by roughly 59% YoY to RMB 12.5 billion in the first half of 2023. From the perspective of land banks, the Group's projects are concentrated in the Greater Bay Area, accounting for approximately 50% of the total land bank.  Given the high population density and relatively favorable economic conditions in this region, there is ample room for further development if the market sentiments improve. It's expected that the cumulative contracted sales during the offshore restructuring period (the next 9 years of the effective date of the restructuring) amount to USD 65.0 billion to USD 75.0 billion. Additionally, the Group also owns 51 investment properties, of which 40 properties are completed. We believe the stable cash flow generated from investment properties could provide a certain degree of support for debt repayment.

Credit-wise, Logan Group's debt totaled RMB 64.1 billion ending 30 June 2023, among which short-term debt was around RMB 41.1 billion, leading to a cash-to-short-term debt ratio of 0.3x. Concurrently, the net gearing ratio reached 118.5%.

According to the statement from Logan Group, it expects to deleverage total borrowings of USD 2.6 billion to USD 3.0 billion through the offshore restructuring plan, implying a debt volume of approximately USD 3.6 billion to USD 4.0 billion after the restructuring, while the cash flow available for repayment of offshore debt will reach USD 4.0 billion and USD 4.7 billion during the period of restructuring, which is theoretically sufficient to cover the debt after the restructuring.

Commentary

Based on the Group’s planned deleveraging of USD 2.6 billion to USD 3.0 billion, the overall principal haircut is around 40% to 45%. Referring to the recent restructuring plans of other Chinese property developers, the principal haircuts are generally over 50% with accrued interest waived. Moreover, the controlling shareholders of the Group make some concessions, with the shareholder loan’s treatment noticeably less favorable than that of normal creditors, as not only can they be excluded from option 1, but also their MCBs under option 4 have a lower coupon rate and are payable in-kind, making the sincerity of plan relatively decent for normal creditors.

However, the options offered by Logan Group are pretty complex and may not be clearly understood by creditors. Therefore, we will restate the four options in as simple terms as possible so that creditors can make a decision that suits their preferences. The whole restructuring plan could be summarized as a cash offer with a large principal haircut, MCB, and medium-term notes with the recovery value depending on the performance of the stock, and no principal haircut for long-term notes.

Although option 1 involves a large principal haircut of 85%, the good thing is that the creditors could be paid in cash immediately, and considering the fact that Logan Group’s bonds are currently trading around $ 10, option 1 can still provide creditors with a rather decent amount of compensation and is suitable for creditors seeking immediate payment. Given that the maximum principal amount of option 1 is capped at USD 1,267 million, accounting for 19.1% of the total outstanding amount and translating into a very high likelihood of oversubscription. We would like to point out that Logan Group does NOT specify how they reallocate the oversubscribed portion in the proposed restructuring plan. We were informed by the relevant financial advisor that the Ad Hoc Group is still in the process of negotiating with Logan Group in this regard and there is no finalized plan yet.

Option 2 entails creditors converting 60% of the existing principal into shares, which has an initial conversion price of HKD 6 per share, suggesting a potential loss of approximately 90% based on the current trading price of HKD 0.6 per share. If creditors do not exercise, it will be converted at HKD 4.50 per share one year after the original issue date on a mandatory basis, leading to a potential loss of 86% based on the current trading price. Though the loss may seem to be less, the stock price at that time (one year after the original issue date) might be lowered than the current price if we factor in the selling pressure after the initial conversion, leaving the potential loss difficult to estimate. In addition, 40% of the existing principal will be converted into a 6-year priority note with amortization, which could provide some protection to the creditors.

Option 3 is similar to option 2, except that it will not be converted into priority notes and the conversion price of MCB is lower, with potential loss at the current trading price of 86% (initial conversion price) and 80% (mandatory conversion price). We believe both option 2 and option 3 are acceptable, and option 3 should appear as a better choice if creditors believe there is a significant rebounding of share price in the future.

As for option 4, even though it does not involve the principal haircut, the long tenor of 9 years suggests a significant uncertainty of future repayment on time. Moreover, the low coupon rate and interest carry in-kind payment, coupled with the fact that the amortization will not commence until the sixth year after the effective date of the restructuring plan, making the overall quality of option 4 apparently lower.  Creditors could give priority to other options.

Since the details have not yet been finalized, we will provide another update when Logan Group announces its final restructuring plan and then further comment on the overall attractiveness of the proposal.