Zhenro Properties’s Restructuring Plan (Updated on 5 January 2024)

On 2 January, Zhenro Properties (“Zhenro”) announced a restructuring plan of its offshore debts. The proposal focuses on the offshore debts and does not include onshore debts. The company said the major creditors holding about 27% of the outstanding principal of the bonds have participated in the restructuring support agreement. The deadline for participating in the restructuring support agreement is 24 January 2024.

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.)

Operating and Debt Overview

As of June 2023, Zhenro had total debts of around RMB 60.7 billion, including offshore debts of about USD 3.9 billion. According to CRIC, in the first ten months of this year, the company’s total contracted sales were around RMB 13.7 billion, with the average monthly contracted sales of around RMB 137 million.

From 2023 to 2027, Zhenro expects its sellable resources of around RMB 110 billion to RMB 120 billion and expects to generate the unlevered free cash flows from projects of around RMB 50 billion to RMB 60 billion. During the period, the company expects to gradually sell its investment properties to boost its funds of around RMB 5 billion to RMB 8 billion.

Based on the above-mentioned debt status and projected cash flows, Zhenro has come up with the following proposed restructuring plan.

Restructuring Plan

The restructuring plan set forth in the term sheet will cover 16 offshore bonds (with principal amount of around USD 930 million). The company will be able to include other guaranteed debts in the plan at its sole discretion (if they do so, the principal amount of new bonds will be adjusted upward on a pro rata basis).

Table 1: Zhenro’s Existing Bonds

The bondholders who vote for the scheme will receive a consent fee of 0.15% of the bond's face value (paid in cash) and a share of an additional USD 95 million of Zhenro’s New Bond Tranche A (see Table 2).

As it is not an exchange offer but a restructuring plan through the courts, it should be binding on all bondholders if the scheme is passed. The company expects the restructuring plan to be effective not late than 30 June 2024.

According to the bondholders’ claim amount (equal to the sum of Outstanding Principal Amount and Accrued / Defaulted Interest), they will receive four new bonds with different tenors (see Table 2):

Table 2: Details of Four New Bonds

The details of New Bonds are listed below:

• The company could pay the coupon in cash or in kind in the first three years.

• In the second half of the second year, at least 0.5% principal amount of the coupon shall be paid in cash. In the third year, at least 3% principal amount of the coupon (1.5% principal amount in the first half and second half respectively) shall be paid in cash. If the total contracted sales in the last 12 months before the coupon payment date reach RMB 35.0 billion, then the minimum cash payment amount will be double.

• For every following year, all coupon shall be paid in cash.

• The cash coupon has 90-day grace period.

• The company has the right to call the bonds before the maturity date with the principal amount plus accrued interest. The priority will be based on the tenor of the new bonds.

• The issuer could further amend key clauses, such as waivers of defaults, coupon rates and/or the maturity date if over 75% of bondholders accept the amendment (“consent solicitation”).

• The credit enhancements could refer to Table 3, Mandatory Redemption Events. Upon the occurrence of the mandatory redemption events, the company should redeem the new notes using the partial or all proceeds.

Table 3: Mandatory Redemption Events

Short Commentary on Restructuring Plan

Zhenro’s restructuring plan is simple and straight-forward. It only involves debt maturity extension and no haircut on the bonds (2% principal haircut if excluding the consent fee). The restructuring method is quite different from others’ defaulted developers.

We believe that the plan could give the time to the company, in order to resume project operations, property sales and gradually dispose of assets on hand at a better price in a few years, so that the company could gradually repay the offshore debts.

Under the poor sentiment in the Chinese real estate industry, the company has greater chances that it cannot reach the target about cash flows from sales. Especially, the company has to pay the coupon in cash and repay a large amount of principal in the fifth year. This puts greater pressure on its cash flow. It also means that the company might default again, or might use consent solicitation to delay principal payments or cash interest payments. As such, it is unlikely that investors will be able to recover their principal as expected.

However, if Zhenro successfully makes repayment in the first four years, the bondholders will be able to get back about 18% of the principal (see Chart 1), which is already much higher than the bond price and the liquidation value. Therefore, we believe that accepting the plan will be a better option.

Chart 1: Given Zhenro’s Successful Repayment, For Every $100 of Claim Amount, the Cash Amount Received by Holders