The restructuring plan from Evergrande (Updated on 4 April)

On 3 April, China Evergrande published a finalized restructuring plan, citing that it has signed the restructuring support agreement (“RSA”) with ad hoc offshore creditor group (representing over 20% of Evergrande’s outstanding bonds), and hereby asking other bondholders to participate in the RSA. 

This scheme is applicable to all existing Evergrande’s USD bonds and requires 75% creditors’ approval to pass. As it is not an exchange offer but a restructuring plan through the court, it should be binding on all bondholders shall it becomes effective. 

The participated bondholders will receive a consent fee of 0.25% of the bond’s face value (payment-in-kind), and the consent fee deadline is 27 April 2023.

This article will only focus on the details of the restructuring plan for Evergrande’s bonds (EVERRE). For details of the restructuring plan for Scenery Journey’s bonds (TIANHL), please refer to the article "Scenery Journey and Tianji’s Restructuring Plans".

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

Restructuring Plan for Evergrande’s Bonds

Creditors holding Evergrande’s USD bonds (EVERRE) are classified as Class A in the restructuring plan, while creditors holding other offshore debts (such as loans and external guarantees) are classified as Class C.

The Group roughly estimated that the accrued claims (including the principal and accrued interests up to the restructuring effective date) for Class A and Class C creditors are USD 17.07 billion and USD 14.67 billion respectively. However, the actual entitlements for Class C creditors are uncertain, as it will then deduct the claims against any party who is not Evergrande (calculated by independent valuation).

In simple, there are two options for Evergrande’s bondholders, and the consent fee for both is equivalent to 0.25% of the outstanding principal. The first option is to convert into new bonds at a 1:1 conversion ratio; and the second option is to convert into new bonds, and/or a package of five equity-linked instruments related to shares of China Evergrande, Evergrande Property Services (“EVPS”) and Evergrande New Energy Vehicle (“NEV”).

Option 1

Class A and Class C creditors who choose Option 1 (aka A1 and C1) will receive 3 different tranches of new bonds. The bonds will distribute interests semi-annually, but can be in cash or in kind, at the election of the Issuer. The details are listed below (see Table 1).

Table 1: Option 1 New Bonds

Below is other important information of Option 1:

• This is the default option, as creditors who do not vote will be automatically assigned to Option 1 if the restructuring plan is approved

• Subject to the participation of Option 1, the new bond tranches A to C will be allocated in ascending order by maturity date

• Subject to the allocation of Option 2, creditors who choose Option 1 may not be fully assigned the above new bonds (further explanations below)

Option 2

Class A and Class C creditors who choose Option 2 (aka A2 and C2) can decide to allocate into two instruments: new bonds, and/or a package of equity-linked instruments related to shares of China Evergrande, EVPS and NEV (the “Package”).

New Bonds Option

In Option 2, the new bonds received by A2 and C2 are different. Below we list out the details of A2 new bonds (see Table 2).

Table 2: Option 2 A2 New Bonds

Below is other important information of A2 new bonds:

• Interests are paid semi-annually

• Issuer can choose to pay interest in cash or in kind for the first 2.5 years

• Must pay at least 0.5% interest in cash for 31^st to 36^th month

• Must pay at least 3% p.a. interest in cash in year 4

• Must pay all interest in cash starting from year 5

• Subject to the participation of Option 2, the new bond tranches A to D will be allocated in ascending order by maturity date

• Subject to the allocation of Option 2, creditors who choose Option 2 new bonds may not be fully assigned the above new bonds (further explanations below)

Package Option

Bondholders can choose to receive Package in Option 2.

According to the abovementioned accrued claims, Evergrande formulated an Initial Portion of Package to allocate several equity-linked instruments related to shares of China Evergrande, EVPS and NEV. Below is the allocation details of the Package Initial Portion (see Table 3).

Table 3: Option 2 Package

From the above, the total amount of A2 and C2 Package Initial Portion is USD 4.89 billion and 3.25 billion respectively. However, since the actual entitlements for Class C will be less than the accrued claims, there will be pro-rata adjustment after confirming the number and the Package Adjusted Portion will be calculated. By then, the total amount of A2 Package Adjusted Portion should be higher than above.

According to our understanding, the total amount of Package Adjusted Portion (i.e. the issue amount of equity-linked instruments) is fixed, so the Group will mandatory reallocate creditors who elected for the Option 2 New Bonds to the Package on a pro-rata basis if the Package is under-subscribed (it will further reallocate Option 1 creditors if it is still under-utilized). On the contrary, if Option 2 Package is over-subscribed, the Group will allocate the extra portion to Option 2 New Bonds on a pro-rata basis.

By definition, mandatory convertible/exchangeable bonds allow holders to convert/exchange their bonds on hand into shares (i.e. will not be repaid in cash) during the conversion/exchange period or on maturity date. Below is the partial information of the three mandatory convertible/exchangeable bonds (see Table 4).

Table 4: Three Mandatory Convertible/Exchangeable Bonds

For the security-linked notes, it means that the related shares are pledged as collateral and deposited in an escrow account, which can then be sold to a strategic investor, with the requirement that the net proceeds must not be lower than the redemption amount of the notes and must be used to redeem the notes.

During the process, the notes should continue to pay interests and will be subject to principal repayment on maturity date, even if the Group is unable to find a strategic investor. In the case that the Group does not pay interests on time or the net proceeds are not used to redeem the notes, the shares in the escrow account shall be enforceable by creditors.

In addition, these notes carry asset security that the Group must use the net proceeds from any sale of assets in the asset lists, to purchase the notes through a reverse Dutch auction. The lists include the equity ownerships held by Evergrande in some companies (e.g. Greater Bay Area Homeland Development Fund, PPLive and Suning Sports), and other receivables (e.g. receivables from Ruyi Holdings and Pumpkin Films)

Below is the partial information of the two A2 security-linked notes (see Table 5). The coupon payment frequency and cash payment requirements for the relevant coupons are the same as those A2 New Bonds mentioned above.

Table 5: Two A2 Security-linked Notes

Commentary

If the accrued claims remain unchanged, this restructuring plan will convert 75% of Evergrande’s offshore debts into new bonds, with the remaining 25% into equity-related package.

Despite all three options (Option 1, Option 2 New Bonds and Option 2 Package) have seemingly no principal haircut, the Package will actually turn 50% of bondholders' claims into mandatory convertible/exchangeable bonds. Considering that the exchange prices for EVPS and NEV per share are quite high, plus the risks of not being able to resume trading, we expect the recovery value of these shares will suffer a significant discount.

For the Option 2 New Bonds, the maximum issue amount can reach USD 12.2 billion according to current accrued claims, and USD 9.6 billion if the Class C deficiency ratio is 20% (as illustrated in Evergrande’s investor presentation). In other words, if bondholders go all-in for Option 2 New Bonds and are fully allocated, around 90% of holdings will become the 7-year and 8-year tranche C and D new bonds, which could be a lengthy wait.

From this perspective, the security-linked notes look more attractive given that their tenors are 5 to 6 years and they have underlying shares as collaterals.

Evergrande mentioned that the core task in next 3 years is to ensure delivery of properties, and expected to require additional financing of RMB 250 billion to 300 billion. Only starting from the fourth year, assuming the Group can resume normal operations (such as the urban redevelopment projects can continue to be developed), an estimated RMB 110 billion to 150 billion of annual unlevered free cash flow could return (not including the repayment of existing debts at the project level).

If investors believe that Evergrande can gradually repay the bonds in cash in next 5 to 8 years, choosing Option 2 New Bonds should be the most reasonable choice. Conversely, investors who do not want to wait too long and have confidence in the value of EVPS and NEV shares may consider Option 2 Package instead. A point to note, creditors who opt for Option 2 are free to allocate any percentages into the New Bonds and the Package, so it is possible to choose both at the same time.

Meanwhile, Option 1 as a default option, the overall quality is apparently lower. The purpose of this option should be alleviating the debt burden by transferring some creditors that never make any instructions away from the main plan. Only creditors who are extremely reluctant to take up any shares or suffer principal write-downs may want to consider this, as if too many creditors opt for option 2 New Bonds, it is possible that some of them will be mandatory converted into Option 2 Package.

Please note that it is not necessary to confirm the option choices when participating in the RSA. Creditors will make the decision only after the restructuring plan has received enough support and the company has officially entered the restructuring process.