Sunac announced preliminary restructuring framework and 2021 annual result

Net Loss of RMB 38.3 Billion Last Year

Sunac’s operating figures deteriorated sharply in 2021 (see Table 1).

Table 1: Sunac’s Operating Figures

As of end 2021, the Group’s key credit metrics are as follows (see Table 2).

Table 2: Sunac’s Credit Indicators

After the bond default, it was already expected that Sunac’s audited results would deteriorate significantly. Even though the Group appears to still hold nearly RMB 70 billion in cash, the vast majority of it is held in project-level regulatory accounts to ensure home deliveries.

Therefore, the latest update on debt restructuring and business development announced by the Group is more important than the outdated 2021 result.

Projected Future Cash Flows Condition

In the announcements, according to the unaudited figures as of June 2022, the Group held approximately USD 11 billion of offshore debts (around RMB 77 billion), while the consolidated cash balance amounted to approximately RMB 41 billion.

Sunac estimated that the total cash flows generated from development projects (including joint ventures and associates) after the repayment of project-level debts is RMB 320 billion in the next seven years, and 20% of this amount (around RMB 64 billion) is expected to be available for repaying offshore debts.

Meanwhile, the overall liquidity of the Group can be increased by approximately RMB 60 billion if it is able to dispose part of its assets over the next seven years or more.

We think the message Sunac wants to imply, is that its cash flows in the next seven years should be able to cover all of its existing offshore debts, with all things being equal.

Preliminary Restructuring Framework

If the above estimations are true, the entire debt restructuring plan may last for seven years or more. In this regard, the Group said that it has been communicating with certain holders of the senior notes and other offshore debts with an aggregate principal amount of approximately USD 9.1 billion (“Existing Debts”), which we believe has already covered almost all the unsecured offshore debts that will fall under the debt restructuring plan.

This group of creditors currently control more than 30% in aggregate principal amount of Existing Debts. Since a scheme of arrangement generally requires the consent of 75% of the holders to pass, having approval from this creditor group is a prerequisite for the plan to go through.

The Group proposed below key elements in the preliminary restructuring framework:

• Converting USD 3 to 4 billion of Existing Debts and certain shareholder loans into common shares or equity-linked instruments

• Exchanging residual Existing Debts into new USD bonds with maturities ranging from two to eight years, and the coupon payments can be accrued in the initial two-year period

• Using net proceeds from the disposal of certain assets for the repayment of the new bonds

• Offering a consent fee for creditors who provide support to the restructuring proposal

In other words, 33% to 44% of the bond principal owned by USD bondholders will be converted into equity or equity-linked instruments. If the plan proposed by the Group is to convert the equity into HKEX-listed Sunac China (Stock Code: 1918.HK), we believe that the diluted value of the shares will be greatly reduced no matter which way it is priced. It will essentially become a faceoff between shareholders and creditors.

On the other hand, since the maturity extension range of two to eight years is too wide and it is now uncertain what asset package Sunac will arrange to dedicate for the repayment of offshore bonds, we need to wait for further concrete details from the Group before making any judgment.

Sunac is reported to have both onshore and offshore restructuring plans recently, which shows that it has a stronger execution ability among the leading property developers in China and is somehow better than other defaulted developers. However, we still think that investors should remain cautious on Chinese real estate bonds until the sector fundamentals display significant signs of recovery.