Logan’s Proposed Restructuring Plan (Updated on 17 January)

On 10th January, Logan Group ("Logan") updated its offshore debt restructuring plan, originally announced in January 2024. This plan mainly focuses on managing offshore debts, with creditors' claims amounting to approximately USD 7.56 billion in outstanding principal, including 12 USD bonds totaling around USD 3.37 billion (see Table 1), and about USD 1.35 billion in shareholder loans. All accrued and unpaid interest on the offshore debts, including penalty interest, special interest, or fees, will be fully waived.

Table 1: Offshore Bonds Involved in the Restructuring Plan

Notably, Logan Group's perpetual bond issuance, LOGPH 7.000% Perpetual Corp (USD) (ISIN: XS1619838292), with a principal amount of USD 350 million, is not included in this proposed restructuring plan.

Creditors who participate and hold their claims until the record date will be eligible to receive an early consent fee or a general consent fee. The early consent fee is 0.125% of the claim amount, with a deadline of 27th January, 2025; the general consent fee is 0.05% of the claim amount, with a deadline of 27th February, 2025.

This plan requires the approval of 75% of the creditors to pass. As it is a court-led restructuring plan rather than an exchange offer, if the plan is approved, it will be binding on all bondholders.

(The following content is for reference only, and all details are subject to the original announcement.)

Restructuring Plan Options

The proposed plan includes four options (see Table 2): (1) Cash payment, (2) Short-term bonds and andatory convertible bonds, (3) Mandatory convertible bonds, and (4) Long-term bonds. Creditors can choose one or more of these options for part or all of their principal amount.

The allocation mechanism for these options is as follows: If the subscription amount for Option 3 is not fully subscribed, the remaining amounts from Options 1, 2, and 4 will first be proportionally allocated to Option 3. If Option 3 is fully subscribed, the remaining amounts will be proportionally allocated based on the maximum acceptable principal amounts of the other unsubscribed options.

Table 2: Restructuring Plan Options

It is worth noting that the company plans to restructure an additional USD 476 million in outstanding offshore debt through bilateral agreements. As part of this additional offshore debt restructuring, the company also has the right to proportionally increase the cap on Option 4.

Additionally, no more than 50% of the shareholder loans can be allocated to Option 1.

Key Terms for Short-Term Bonds (Option 2) and Long-Term Bonds (Option 4)

Table 3 lists the main terms for the short-term and long-term bonds, including the maturity period, annual coupon rate, interest payment methods, and bond installment payments.

It is important to note that for short-term bonds, if the company pays at least 0.25% cash interest in the third year, it has the right to defer the remaining cash interest and principal due in the third year to the end of the fourth year.

Table 3: Key Terms for Short-Term Bonds and Long-Term Bonds

Key Terms for Mandatory Convertible Bonds (Option 2 and 3)

On the other hand, the terms for the mandatory convertible bonds in Options 2 and 3 are the same. They have a maturity period of two years, with no coupon interest, and a conversion price of HKD 6.

Holders must convert 33% of the principal amount into Logan Group's (stock code: 3380.HK) shares on the issuance date. Subsequent conversion dates are at 6, 12, and 18 months, and at maturity. From the 6th month onwards, there is no limit on the conversion ratio each time, but holders must convert a certain percentage of the principal amount according to the conversion schedule (see Table 4).

Table 3: Key Terms for Mandatory Convertible Bonds

Based on the current price of HKD 0.99 per share and a conversion price of HKD 6, creditors of Options 2 and 3 will recover approximately 16.5% of the principal amount of the mandatory convertible bonds.

Additionally, the total issuance amount for the mandatory convertible bonds is USD 3.27 billion, meaning the group will issue approximately 4.25 billion new shares. This represents about 75% of the current share count (approximately 5.69 billion shares). This indicates that, upon full conversion of the mandatory convertible bonds, shareholders may face a dilution effect of more than one and a half times.

Credit Enhancement Measures

The new short-term and long-term bonds will have credit enhancement measures, including designated bank accounts and cash receipts from certain projects (see Table 5). The first designated account will be shared by both new short-term and long-term bondholders, while the second designated account will be exclusively for the new short-term bonds.

Notably, the new short-term bonds have a more favorable repayment order for cash receipts from three Category B onshore projects (see Table 6).

Table 5: Designated Accounts and Project Credit Enhancement Measures

Table 6: Details of Designated Projects

Main Changes in the Restructuring Plan

Compared to the restructuring plan proposed by Logan Group in January last year, the terms of this plan are significantly worse. The key changes include waiving accrued interest, reducing the maximum acceptable amounts for Options 1 and 4, directly cutting the principal amount by 56% for the mandatory convertible bonds in Option 2, unifying and increasing the conversion prices of the mandatory convertible bonds involved to HKD 6 from the previous HKD3, 4.25, or 6, and significantly lowering the coupon rates of the bonds.

It is noteworthy that this restructuring plan optimizes the treatment of controlling shareholders. Shareholders, who were previously unable to participate in Option 1, can now have up to 50% of their shareholder loans allocated to Option 1. Moreover, the terms that required long-term bonds to be paid in kind at a lower coupon rate than other creditors have been removed. These changes are clearly unfavorable to ordinary creditors, making it more difficult for them to obtain allocations under Option 1.

Restructuring Plan Commentary

Presented below are the benefits and drawbacks of each option when analysed independently (see Table 7):

Table 7: Commentary on Each Option in the Restructuring Plan

After thorough consideration, we find the proposed restructuring plan significantly lacking in sincerity. The terms for each option are decidedly worse than those in the original proposal. Most critically, the maximum issuance amounts for Options 1 and 4 are capped at just 10% and 8% of the total principal, respectively. This limitation makes it nearly impossible for creditors to fully allocate to these options. Conversely, Options 2 and 3, which constitute 82% of the total principal, are the less desirable choices, highlighting the plan's extreme bias against creditors.

The company appears to offer creditors a "free choice," but in reality, it restricts bondholders from converting all their claims into new long-term bonds (Option 4) or receiving immediate cash (Option 1). Instead, it imposes principal reductions or stock-related instruments. Consequently, we suggest creditors consider not joining the "creditor support agreement" and vote against this restructuring plan at the creditors' meeting.

It's important to note that even if creditors opt out of the "creditor support agreement," they can still select different options within the restructuring plan if it passes. The only downside is the loss of the consent fee (0.125% or 0.05% cash).

From the plan's perspective, there is considerable room for improvement, such as increasing the maximum acceptance amount for Option 4 and lowering the conversion price of mandatory convertible bonds. Should offshore creditors band together to reject this restructuring, the company is likely to propose a better plan, or creditors may seek a court liquidation order, placing the company into liquidation (worst-case scenario). Given the company's several offshore projects, creditors still have a chance to recover part of the principal. Therefore, opposing the plan may yield greater benefits for creditors compared to being forced to accept it.

Taking inspiration from Sunac's earlier restructuring, recent reports indicate that due to the inability to repay the first batch of bonds worth only USD 500 million in principal, a second restructuring is on the horizon. Currently, the prices of its short-term bonds (maturing in 2025) and long-term bonds (maturing in 2030) are both around 8 yuan. Hence, short-term bonds are not necessarily superior to long-term bonds. Similarly, if Logan faces a comparable situation, Option 4 will retain more claim amounts and offer greater advantages during a second restructuring, making it a more reasonable choice than Option 2.

Lastly, the immediate cash in Option 1 also holds certain merits. From the perspective of plan options, creditors should prioritize considering Options 1 and 4.

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