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On 6 August, Yuzhou announced the proposed restructuring plan for its offshore debt. The proposal focuses on offshore debts and does not include onshore debts.
Yuzhou categorises its offshore creditors into two groups, as detailed in the table below:
Table 1: Creditor Types and Relevant Bonds
|
Creditor Type |
Detail |
Bond Name |
Outstanding Amount (Billion USD) |
|
Class 1 |
Senior Noteholders |
YUZHOU 6.000% 25Oct2023 Corp (USD) YUZHOU 8.500% 26Feb2024 Corp (USD) YUZHOU 8.375% 30Oct2024 Corp (USD) YUZHOU 7.700% 20Feb2025 Corp (USD) YUZHOU 8.300% 27May2025 Corp (USD) YUZHOU 7.375% 13Jan2026 Corp (USD) YUZHOU 7.850% 12Aug2026 Corp (USD) YUZHOU 6.350% 13Jan2027 Corp (USD) |
4.06 |
|
Class 2 |
Perpetual Noteholders |
YUZHOU 5.375% Perpetual Corp (USD) |
0.3 |
|
Sources: Company’s Announcements, iFAST compilations Data as of 6 August 2023 |
|||
Since
the vast majority of offshore bondholders are Class 1 creditors, we will
analyze the company's restructuring plan mainly from the perspective of Class 1
creditors.
(The following information is for reference only and the details are subject to the original announcement)
Restructuring Plan
The restructuring plan is contemplated to involve giving creditors three options, namely 1) New Notes with a short-term maturity (“STN”), 2) New Notes with medium-term maturities (“MTNs”) + new shares to be issued by the Company + LTN, 3) New Notes with long-term maturity (“LTN”). The Early bird consent fee and consent fee for the restructuring plan are 0.2% and 0.1% of the principal amount of the existing notes, respectively.
It is important to note that creditors could only pick one of the three options and will not be free to allocate. Details of the three options are set out below:
Option 1: New Notes with a short-term maturity
Creditors who choose Option 1 will convert every USD 100 of principals of existing notes into USD 30 of new notes, translating into a 70% principal haircut. The tenor of the new note is three years with a coupon rate of 6%, payable semi-annually. Additional information is shown below:
Table 2: New Note with a Short-term Maturity
|
Conversion Ratio |
10：3 |
|
Cap |
Maximum issuing principal of USD 380 million |
|
Tenor |
3 Years |
|
Coupon |
6% |
|
Installment |
5.3% principal payment immediately upon the effective date of the restructuring plan, and 5% principal payment semi-annually beginning in the second year. |
|
Sources: Company’s Announcements, iFAST compilations Data as of 6 August 2023 |
|
- The conversion ratio for Class 2 creditors (perpetual bondholders) is 10:0.92, which means every USD 100 of the principal of existing notes will be converted into USD 9.2 of new notes, with a haircut of 90.8%.
- The interest of new notes will be paid semi-annually with a cash coupon.
- The principal of new notes will be paid in installments, with a 5.3% principal payment immediately upon the effective date of the restructuring plan, along with a 5% principal payment semi-annually beginning in the second year.
- The new notes will be issued up to a maximum principal amount of USD 380 million, accounting for 30.5% of the total outstanding amount (after the principal haircut). The oversubscription will be allocated to Option 2.
- Shares in 16 wholly foreign-owned entities held by the company's subsidiaries will be pledged as credit enhancement with first priority. STN would be further secured by a share pledge of over 10% of the company's controlling shareholders' shareholding in the post-restructuring as additional credit enhancement.
- The Cash Sweep would be funded by 70% of the net proceeds from the disposal of 33 investment properties and 70% of the distributions and/or realisations by the shareholders of 5 wholly foreign-owned entities project companies held by the company's subsidiaries. Cash sweep proceeds could be used by the company in its sole discretion for bond repurchase, and repayment of principal due in the next six months.
Option 2: New MTNs + New Shares + New LTN
Creditors who choose Option 2 will convert every USD 100 principal of existing notes into USD 70 of new MTNs and USD 30 of new shares issued by the company. Accrued and unpaid interest will be converted into LTN at a conversion ratio of 2:1, implying that every dollar of accrued and unpaid interest shall be converted into 0.5 dollars of LTN.
Table 3: Conversion Ratio
|
Conversion Ratio |
|
|
MTNs |
Every USD 100 of principal to USD 70 of new notes |
|
LTN |
Every USD 1 of accrued and unpaid interest to USD 0.5 of LTN |
|
New Shares |
Every USD 100 of principal to USD 30 of new shares at conversion price of HKD 3.76 per share |
|
Sources: Company’s Announcements, iFAST compilations Data as of 6 August 2023 |
|
Table 4: MTNs and LTN
|
Issue Size (Million USD) |
Coupon |
Tenor |
|
|
MTN Tranche I |
378 |
4.0% |
4 Years |
|
MTN Tranche II |
655 |
4.5% |
5 Years |
|
MTN Tranche III |
870 |
5.0% |
6 Years |
|
MTN Tranche IV |
TBD |
5.5% |
7 Years |
|
LTN |
TBD |
0% |
10 Years |
|
Sources: Company’s Announcements, iFAST compilations Data as of 6 August 2023 |
|||
The following are important points to take note:
- For Class 2 creditors (perpetual bondholders), every USD 100 principal of existing notes will be converted into USD 21.5 of new notes and USD 78.5 of new shares.
- For the first three years after the effective date of restructuring, all or part of the interest will be PIK (Payment-in-kind). This is dependent on the payment schedule of the STN of Option 1, with MTNs commencing to be paid in cash if the STN is fully paid or redeemed prior to the maturity.
- Interest on the MTNs is payable semi-annually.
- Shares in 16 wholly foreign-owned entities held by the company's subsidiaries will be pledged as credit enhancement with second priority, meaning that Option 1 has a higher priority on credit enhancement over Option 2.
- The Cash Sweep would be funded by 70% of the net proceeds from the disposal of 33 investment properties and 70% of the distributions and/or realisations by the shareholders of 5 wholly foreign-owned entities project companies held by the company's subsidiaries. Cash sweep proceeds could be used by the company in its sole discretion for bond repurchase, and repayment of principal due in the next 6 months. Likewise, Option 2 is granted second priority.
Option 3: LTN
The conversion ratio for creditors who choose Option 3 is 1:1, meaning every USD 100 of the principal of existing notes will be converted into USD 100 of new LTN, which is zero-coupon with a maturity of 10 years.
It is important to note that
- All accrued and unpaid interest will be waived.
- Yuzhou has the right to redeem the LTN at a price of a sliding scale, which is to increase over time. The redemption price is yet to be announced.
- Option 3 would be the default option for creditors who do not validly submit relevant documents to indicate their preferred option for the new notes.
- 42 subsidiaries guarantors and shares will be pledged as credit enhancement (excluding Class 2 creditors). The details are also yet to be announced.
Operation
and Credit Highlights
As of December 2022, Yuzhou owns 172 property projects in 38 cities in China and 41 investment properties. The contracted sales slumped by 66.1% YoY to RMB 35.6 billion in 2022. From the perspective of land banks, most property projects are located in the Yangtze River Delta region with ample room for further development if the market sentiments improve. Yuzhou states that these projects would likely generate an unlevered cash flow of RMB 40 billion to RMB 50 billion from 2023 to 2032.
Credit-wise, as of 31 December 2022, the total interest-bearing debt stood at RMB 55.1 billion, of which short-term debt was around RMB 49.9 billion, leading to a cash-to-short-term debt ratio of 0.1x. Concurrently, the net gearing ratio reached 197.3%. In addition, the company owns a large number of joint ventures, with a minority interest/total equity ratio of 52.2%, reflecting that Yuzhou might face some off-balance-sheet debt.
Yuzhou proposes to dispose of certain investments and assets to alleviate its liquidity pressure, and the estimated net proceeds from asset disposal between 2023 and 2027 will be in the range of RMB 11 billion to RMB 17 billion, together with the unlevered cash flow generated from property sales, the total funds available for repayment of offshore debt will reach RMB 27 billion and RMB 32 billion, which is theoretically sufficient to fully cover the debt after the restructuring.
Short Commentary
In comparison with other developers' restructuring plans, the plan offered by Yuzhou is rather easy to understand, and to a certain extent, it is convenient for creditors to make a decision that suits their preferences.
Although Option 1 involves a principal haircut of 70%, given that Yuzhou’s bonds are currently trading around $5-6, Option 1 can still provide creditors with a decent amount of compensation. Secondly, the STN in Option 1 pays interest in cash and has a clause of installment payment, leaving creditors less uncertain. Additionally, Option 1 has priority in both credit enhancement and cash sweep. In short, STN has a higher priority than MTNs, and MTNs have a higher priority than LTN, which provides some protection for creditors who choose Option 1.
Given the limited issue size of STN in Option 1(around 30.5% of total debt after principal haircut), the likelihood of oversubscription is very high, and creditors might be allocated to Option 2 as a result. Option 2 entails creditors converting 30% of the principal into a new share, which has a conversion price of HKD 3.76 per share, suggesting a potential loss of approximately 95% based on the current trading price of HKD 0.2 per share. However, if the new MTNs after conversion could be paid as scheduled, Options 2 is still pretty sincere, because it faces a less principal haircut than Option 1, and the improved market sentiments could be able to drive up the share price, resulting in a higher recovery value than expected. Investors thus can still give consideration to Option 2.
As a default option, the overall quality of Option 3 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.
Unlike the restructuring plans of Evergrande and Sunac, Yuzhou’s plan does not include off-balance-sheet debt, like private placement debt. However, we believe that the company indeed faces some offshore private placement debt. The reason why private placement debt is not included in the restructuring plan may be due to the fact that Yuzhou already reached an agreement with related creditors, which would be unfair to other creditors.
Since the details have not yet been finalised, and even the timetable of RSA is not specified. We will provide another update when Yuzhou announces its final restructuring plan and requests a vote from bondholders. We will then further comment on the overall attractiveness of the proposal.
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.
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