Shimao Group’s Proposed Restructuring Plan (Updated on 30 July)

Receive first-hand news on the latest bond issues, credit updates and special events when you join us on our Telegram channel at https://t.me/bondsupermart!

Highlights:

• The revised restructuring plan is acceptable. Considering the low Shimao’s bond price, accepting the plan should have a higher recovery value compared to selling the bond at the market.

• Although there is around 50% principal haircut in Option 1, if the company can fulfill most of its commitments to repay the principal and interest gradually, Option 2 has certain merits.

• Option 2 does not have principal haircuts, which is suitable for creditors who are not willing to accept the principal haircuts.

• Option 3’s conversion price is high. Creditors who choose Option 3 have to accept a large portion of indirect principal haircuts, but the proceeds should be higher than the cash received from selling the bond at the market immediately. However, the ultimate recovery value is also subject to the stock price volatility.

• For normal bondholders, receiving the consideration for Option 1 or Option 2 in the form of bond should be more reasonable. 

On 25 March 2024, Shimao Group (“Shimao”) announced a restructuring plan of its offshore debts. The proposal focuses on the offshore debts and does not include onshore debts. On 26 July, Shimao published an amendment agreement to the restructuring support agreement. The bold text in this article is the updated content.)

Because of the large amount of information in the announcement, this article will consolidate the key details only, while some of them cannot be fully covered.

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

The participating bondholders will receive a consent fee of 0.2% cash (0.1% early consent fee and 0.1% basic consent fee) and 1.5% short-term bond / loan (as defined below, the early consent fee of 1% and the basic consent fee of 0.5%) based on the principal value.

The deadlines for the early consent fee and basic consent fee are 30 August 2024 and 30 September 2024 respectively.

Restructuring Plan Background

The restructuring plan set forth in the term sheet will cover eight offshore bonds and two private bond (with principal amount of around USD 6.79 billion, as shown in Table 1) and 23 offshore loans (the total loan amount of around USD 4.66 billion)

Table 1: Shimao’s Existing Bonds

As it is not an exchange offer but a restructuring plan through the courts, it should be binding on all involved creditors if the scheme is passed.

The creditors’ claim amount is equal to the sum of outstanding principal amount and accrued / defaulted interest up to the end of 2023.

Restructuring Plan Options

Creditors could choose accept a fixed combination of Option 4, or freely allocate Option 1 to Option 3. If a creditor chooses free allocation with a selection of Option 1 or/and Option 2, the creditor might be flowback to other options as a result of the option being oversubscribed (see Table 2 and Chart 1). Besides, creditors have to choose to receive bonds or loans under Option 1 and Option 2.

Table 2: Restructuring Options

Chart 1: Selection and Allocation Mechanism

Option 1: Short-term Bond / Loan

Under Option 1, creditors receive either a short-term bond or short-term loan based on their principal amount.

Short-term Bond

• The bond has a maturity of 6 years but have a mandatory redemption schedule with redemption prices of 50% (see Table 3).

• The coupon rate is 5% (paid in cash) or 6% (paid in kind). It will be calculated at 50% principal amount, payable semi-annually.

• The issuer could choose to pay coupon in cash or in kind for the first four years, but the issuer has to pay at least 0.1% coupon in cash from the first year after restructuring effective date, and the coupon to be paid in cash from the fifth year onwards

• The issuer could further amend key clauses, such as waivers of defaults, interest rates and/or the maturity date if over 75% of holders accept the amendment.

• Have guarantees and collaterals (see the below section, “Guarantees, Collaterals and Credit Enhancement” for more details).

Table 3: Mandatory Redemption Schedule of Short-term Bond

Short-term Loan

• The loan has a maturity of 6 years but have a mandatory redemption schedule with redemption prices of 50% (see Table 4).

• The interest rate is 5% (paid in cash) or 6% (paid in kind). It will be calculated at 50% principal amount, payable semi-annually.

• The issuer could choose to pay interest in cash or in kind for the first four years, but the issuer has to pay at least 0.05% cash interest from the first year after restructuring effective date, and the coupon to be paid in cash from the fifth year onwards

• The issuer could further amend key clauses, such as waivers of defaults, interest rates and/or the maturity date if over 75% of holders accept the amendment.

• Have guarantees and collaterals (see the below section, “Guarantees, Collaterals and Credit Enhancement” for more details).

Option 2: Long-term Bond / Long-term Loan

Under Option 2, creditors could choose the long-term bond or long-term loan plan:

Long-term Bond

Creditors will receive three tranches of bonds (Tranche A, Tranche B and Tranche C representing 25%, 37.5% and 37.5% of the principal amount respectively). The details are listed below (see Table 5):

• The coupon rate is 2% (paid in cash) or 3% (paid in kind), payable semi-annually.

• The issuer could choose to pay coupon in cash or in kind for the first six years, but the issuer has to pay at least 0.1% cash interest from the first year after restructuring effective date, and the coupon to be paid in cash from the seventh year onwards

• The issuer could further amend key clauses, such as waivers of defaults, coupon rates and/or the maturity date if over 75% of holders accept the amendment.

• Have guarantees and collaterals (see the below section, “Guarantees, Collaterals and Credit Enhancement” for more details).

Long-term Loan

Creditors will receive a long-term loan based on their principal amount. The details are listed below:

• The loan have a maturity of 9 years, with a mandatory redemption schedule (see Table 6).

• The interest rate is 2% (paid in cash) or 3% (paid in kind), payable semi-annually. The issuer has to pay at least 0.05% cash interest from the first year after restructuring effective date.

• The interest could be paid in kind for the first 6 years and will be paid in cash afterwards. When the issuer partially redeems the loan since the seventh year, they should repay the paid in kind part together with the redeemed principal amount.

• The issuer could further amend key clauses, such as waivers of defaults, coupon rates and/or the maturity date if over 75% of holders accept the amendment.

• Have guarantees and collaterals (see the below section, “Guarantees, Collaterals and Credit Enhancement” for more details).

Table 6: Mandatory Redemption Schedule of Long-term Loan

It is worth noting that in theory, since the purpose of the short-term loan and long-term loan issued by Shimao is to allow the original loan lenders to replace the old loan with another loan, while the distribution of the new loan will still be made in proportion to the creditors' selection at the end of the day, the large banks should become the major holders of the short-term and long-term loan. In this case, considering that the loan is inherently different from a bond (e.g., lower disclosure requirements as it is unlisted, different procedures for carrying out corporate actions, including voting, and being not tradable in the open market), choosing the loan options carries a certain degree of risk for bondholders.

Option 3: Mandatory Convertible Bond

Creditors will receive a long-term loan based on their principal amount. The details are listed below (see Table 7):

• Holders could convert the principal amount into Shimao Group’s new shares (Stock Code: 813.HK) within 15 business days after the issue date.

• The principal amount will be mandatorily converted into new shares of Shimao Group in the first three months, the first six months, the first nine months and the first twelve months (25% in each case) after the restructuring effective date.

• Holders may also request early conversion of their entire principal amount into new shares of Shimao Group at any time, provided that the total principal amount reaches USD 500 million to become effective immediately; if less than USD 500 million, the conversion request will become effective in the first three months, the first six months, the first nine months or the first twelve months after the restructuring effective date.

• The conversion price is equal to HKD 6.

• No coupon

• The issuer could further amend key clauses if over 66% of holders accept the amendment.

Table 7: Mandatory Convertible Bond’s Estimated Principal Haircut and Recovery Value

Option 4: Fixed Combination

The creditors could receive a fixed combination of short-term bond / loan, long-term bond / loan and mandatory convertible bond with a principal amount of 32%, 32% and 36% respectively. The definition can be found above.

From our understanding, this option is mainly requested by some creditors, particularly those on the bank side. This can provide creditors with a better portfolio certainty.

Guarantees, Collaterals and Credit Enhancement

The short-term bond / loan and the long-term bond / loan have the same guarantors, collateral and credit enhancements, as set out below:

• Guaranteed by Shimao’s 31 offshore subsidiaries and company shares in 15 offshore key subsidiaries as collateral

• Around 62.8% stake in Shimao Services, with a market value of around HKD 1.15 billion, as collateral

• Pledge of key offshore intercompany receivables

• Pledge of offshore bank accounts receiving the proceeds from the special assets (including the Tai Wo Ping Project and Tung Chung Hotels in Hong Kong, six specified onshore assets and six specified hotel assets), net debt financing, Shimao Services (Stock Code: 873.HK) and Shanghai Shimao (Stock Code: 600823.CN). The certain percentage of these proceeds are required to repurchase or repay the offshore debts (see Table 7). The repayment priority of the short-term bond / loan is higher than that of the long-term bond / loan.

Table 7: Credit Enhancement / Event Trigger

However, creditors should note that Shanghai Shimao is subject to a higher risk of delisting. Shimao did not disclose any remedial measures for the time being. The recovery value of Shanghai Shimao shareholding could be limited. As for the remaining assets in credit enhancement, the Group intends to sell these assets at a better price to raise funds to repay the offshore debts as possible.

In addition, as Shanghai Shimao is a listed company, which is not wholly owned by the Shimao Group, and it is also subject to debt defaults, the Shanghai Shimao’s inflow to Shimao Group could be more limited. Thus, we deduce that the Group's onshore credit enhancement is likely come from projects of Shanghai Shimao Jianshe Co. (fully owned onshore subsidiary by the Group).

The Shimao Group’s controlling shareholder, Mr. Hui Wing Mau, will also participate in the restructuring plan. He would convert his shareholder loan of around HKD 7.8 billion to the Group into the long-term bond tranche B of approximately USD 600 million and the mandatory convertible bond of about USD 400 million in principal amount.

The long-term bond tranche B has a maturity of 9.5 years, with the all coupon payment in kind. In theory, the repayment priority of the long-term bond tranche B is lower than that of the short-term bond / loan and long-term bond / loan received by general creditors. The mandatory convertible bond received by Hui Wing Mau will be the same as the Option 3.

Operating Update

As shown in Chart 2, Shimao Group’s currently hold around 62.9% of Shimao Services and 63.5% of Shanghai Shimao respectively. Shimao Jianshe Co. is the Group’s fully owned onshore subsidiary. The Group mainly engages in onshore real estate projects through Shimao Jianshe Co. and Shanghai Shimao and engages in property management business through Shimao Services.

Chart 2: Shimao Group’s Corporate Structure (Simplified Version) 

Shimao's total contracted sales in the first half of 2024 amounted to about RMB 17.1 billion, representing a YoY decrease of about 51%. In 2023, the Group's revenue decreased 5.7% YoY to RMB 59.5 billion. The core loss attributable to shareholders was RMB 14.5 billion.

The Group estimates that the net proceeds from property development and property investment will range from approximately RMB 4 billion to RMB 40 billion per annum from 2023 to 2033, with a cumulative unleveraged operating cash flow of around RMB 200 billion to RMB 250 billion. The Group’s cumulative leveraged cash flow is estimated to be around USD 1.5 billion to USD 2.0 billion, most of which are expected for repayment of offshore debts after restructuring.

As at the end of 2023, the Group's total assets and total debts were around RMB 543.3 billion and RMB 269.9 billion respectively. The liability to asset ratio (excluding contracted liabilities) were around 89%, with the total debt / total property investment of around 75%. These ratios show that the Group is yet to enter the insolvent status. The balance sheet is better than other defaulted developers.

Some of the Shimao’s projects were included in the “Whitelist”, a new policy introduced by Chinese government. It could relieve the pressure on “delivery of homes”, and probably enable Shimao to gradually return to normal operation. Under the current situation, Shimao needs to buy time in order to sell its assets at a more favorable price, so as to avoid the need to sell its assets cheaply due to the debt pressure, and to avoid enter the vicious cycle of "insolvency" and accelerated selling of assets in a deep discount.

Summary of Restructuring Plan

Overall, the revised restructuring plan is acceptable. Considering the low Shimao’s bond price, accepting the plan should have a higher recovery value compared to selling the bond at the market. As there are different choices of restructuring options, creditors can make their choices according to their preferences:

• Although there is around 50% principal haircut in Option 1, the priority of repayment is higher than that of the long-term bond / loan under Option 2. If the company can fulfill most of its commitments to repay the principal and interest gradually, Option 2 has certain merits.

• Option 2 does not have principal haircuts, which is suitable for creditors who are not willing to accept the principal haircuts. However, creditors have to wait the Group to repay all short-term bond / loan (from the seventh year onwards) under Option 1, before repaying the large portion of the principal amount. The overall uncertainty remains high.

• Option 3’s conversion price is high. Creditors who choose Option 3 have to accept a large portion of indirect principal haircuts, but the proceeds should be higher than the cash received from selling the bond at the market immediately. However, the ultimate recovery value is also subject to the stock price volatility.

• Option 4 is a fixed combination from Option 1 to Option 3, providing a better portfolio certainty.

• For normal bondholders, receiving the consideration for Option 1 or Option 2 in the form of bond should be more reasonable. Bonds have a better trading liquidity and more transparent market prices.