Times China’s Offshore Debt Restructuring Plan

Restructuring Plan Options

Creditors can choose from the following options: (1) upfront cash, short-term bonds, and new company shares; (2) Mandatory Convertible Bonds I and medium-term bonds; (3) long-term bonds. And the accrued and unpaid interest on the debt will be distributed in the form of Mandatory Convertible Bonds II. The details of the restructuring consideration are as follows:

Table 2: Restructuring Plan Options

• Upfront cash equivalent to 1.5% of the principal amount
• A short-term bond equivalent to 28.5% of the principal amount
• New company shares

The short-term bond has a term of 3.5 years with a 4% interest rate, payable semi-annually. In the first two years, the issuer must pay at least 1% of the interest in cash, with the remaining portion paid in kind (PIK). After the third year, all interest will be paid in cash. At maturity, the issuer will redeem the bond at 100.

Creditors under Option 1 will also receive new shares of Times China (stock code: 1233.HK) on a pro-rata basis. After issuing new shares and converting all Mandatory Convertible Bonds I and II, the company's chairman, Shum Chiu Hung, will have to hold 30.1% of the company's shares. As of June, Shum held 59% of the company's total 2.1 billion shares. According to our calculations, this means the company will issue approximately 540 million new shares at a conversion price of about HKD 6.8 per share.

Option 2: Mandatory Convertible Bonds I and Medium-Term Bonds

Creditors under Option 2 will receive:

• Mandatory Convertible Bonds I equivalent to 55% of the principal amount
• Medium-term bonds equivalent to 45% of the principal amount

The term of Mandatory Convertible Bonds I is 1.5 years with no interest. Holders can convert them into Times China shares at a conversion price of HKD 6 per share from the issuance date. Any unconverted bonds at maturity will automatically convert into shares.

Additionally, creditors under Option 2 will receive medium-term bonds equivalent to 45% of the principal amount. These bonds have a 7-year term with an interest rate of 4.2%, payable semi-annually. In the first year, the issuer can choose to pay the interest in cash or in kind (PIK). During the second and third years, at least 0.3% of the interest must be paid in cash, with the remaining portion optionally payable in cash or PIK. From the fourth year onwards, all interest will be paid in cash.

The principal repayment schedule for these bonds is detailed in Table 4:

Table 4: Principal Repayment Schedule for 7-Year Medium-Term Bonds

Option 3: Long-Term Bonds

Creditors under Option 3 will receive long-term bonds equivalent to 100% of the principal amount. These bonds have a term of 8 years, but the company has the right to extend the term to 10 years. The bonds have an interest rate of 4.5%, payable semi-annually. The issuer can choose to pay the interest in cash or PIK for the first five years. From the sixth year onwards, all interest will be paid in cash.

The principal repayment schedule for these bonds is detailed in Table 5:

Table 5: Principal Repayment Schedule for 8-Year Long-Term Bonds

Accrued and Unpaid Interest for Each Option: Mandatory Convertible Bonds II

The above details the principal repayment for each option. For accrued and unpaid interest, the company will distribute it in the form of Mandatory Convertible Bonds II.

These bonds share similar terms with Mandatory Convertible Bonds I, featuring a 1.5-year term and automatic conversion into shares at maturity if unconverted. However, the conversion price for Mandatory Convertible Bonds II is higher at HKD 10 (compared to HKD 6 for Mandatory Convertible Bonds I). Based on this conversion price and Times China's current price of HKD 0.35, the estimated recoverable accrued interest for each option is as follows:

Table 6: Issuance Amount and Estimated Recoverable Accrued Interest of Mandatory Convertible Bonds II for Each Option

Given the relatively small amount of accrued interest (around USD 490 million for the total debt covered by the plan) and the high conversion price of Mandatory Convertible Bonds II compared to the current price, creditors can recover at most only 3.5% of the accrued interest under any option. Therefore, this should not be a primary consideration for creditors when making their decision.

Dilution Impact of New Shares and Convertible Bonds

Upon converting all Mandatory Convertible Bonds I and II into shares and issuing new shares, Chairman Shum must hold 30.1% of the company’s shares. We estimate the issuance of approximately 540 million new shares to repay about USD 460 million of principal, with a conversion price of around HKD 6.8 per share (see Table 6 for a comparison of conversion prices).

As of June this year, Times China had a total of 2.1 billion shares. After issuing all Mandatory Convertible Bonds I, Mandatory Convertible Bonds II, and new company shares, shareholders may face nearly double the dilution effect.

Table 7: Dilution Effect of New Company Shares and Mandatory Convertible Bonds

Restructuring Plan Commentary

The five new bonds (short-term, medium-term, long-term, and two convertible bonds) share the same guarantees and collateral. These are identical to the bonds issued in June 2021, with the addition of 70% of proceeds from the sale of specified assets used for repayment (details in the appendix).

It's important to note that short-term bonds have seniority over medium-term, long-term, and convertible bonds, while the latter three share equal seniority.

The following table summarizes the consideration for each option. These recovery values are based on the current price of HKD 0.35 and the estimated volume of convertible bonds and new shares issued. We anticipate significant future fluctuations in the stock price, so these values are for reference only.

Table 8: Consideration for Each Option

In summary, Times China's plan involves a significant amount of debt-to-equity swaps, introducing considerable uncertainty, but the options are relatively balanced. With the low current stock price and high conversion price—one of the highest in Chinese real estate restructuring plans—the indirect debt reduction through equity conversion is substantial, yet it allows investors to cash out quickly. Conversely, short, medium, and long-term bonds carry credit risk, with longer terms bearing higher default risk.

Option 1 offers short-term bonds with payment seniority. If the company repays these bonds smoothly, the recovery rate will exceed 30%. Investors eager to recover their principal and not concerned about principal reduction can choose Option 1.

Option 2 is where most investors will be allocated. It provides reasonable recovery value but requires time. If the company’s stock price is not expected to rebound in the short term (within 1.5 years after the effective date), Option 2's Mandatory Convertible Bonds add little recovery value. In comparison, the medium-term bonds in Option 2 are only 1-3 years shorter than the long-term bonds in Option 3, but their recovery value is about 55% lower. If the company successfully restructures and resumes operations, both bonds with similar terms are likely to be repaid. Therefore, investors confident in Times China and the Chinese real estate market may opt for Option 3.

Appendix

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.