Zhongliang’s restructuring plan (updated on 24 July)

On 1 June, Zhongliang Holdings has announced a proposed restructuring of its offshore debts. The proposal focuses on the offshore debts and does not include onshore debts.

On 16 July, the Group said the major creditors holding about 38.5% of the outstanding principal of the bonds have participated in the restructuring support agreement, and it is now formally inviting other creditors to participate. The deadline for consent fee is 11 August 2023.

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.)

Restructuring Plan

The restructuring plan set forth in the term sheet will cover the 5 offshore USD bonds issued by Zhongliang, and the company will be able to include other debts upon the approval of majority members in the major creditor group. The expected restructuring effective date is 1 January 2024, and it will not be earlier than 1 November 2023.

Under this scheme, existing bondholders will receive an upfront payment of 1% of the outstanding principal, and a combination of New Bonds and New Convertible Bonds with an amount equal to 99% of outstanding principal (plus accrued interest), which the creditors can make their own allocation on these two instruments.

Furthermore, the company will issue Additional New Bonds with an amount equivalent to 6.0% of the New Bonds to be issued, and then it will be added to the total size of the New Bonds. In other words, the creditors who receive the New Bonds will technically get an extra 6% principal payment-in-kind.

Bondholders who participated in the restructuring support agreement can receive a consent fee of 0.25% of the eligible restricted debts.

Theoretically, the issue size of New Convertible Bonds is subject to a maximum amount of USD 140 million, but Zhongliang can increase the cap at its sole discretion. If the amount electing the New Convertible Bonds exceeds the cap, the company will allocate the excess amount to the New Bonds on a pro-rata basis.

The details of New Bonds are listed below (see Table 1).

Table 1: New Bonds

• The bond will only accumulate interest one year after the Key Date

• The company is required to redeem extra principal on certain dates if it reaches a set of designated sales target:

• If the contracted sales from 1 January 2023 to the date falling 9 months after the Key Date exceeds RMB 120 billion, it has to redeem 5% principal on the 12^th month
• If the contracted sales from 1 January 2023 to the date falling 21 months after the Key Date exceeds RMB 160 billion, it has to redeem 10% principal each on the 24^th and 30^th month
• If the contracted sales from 1 January 2023 to the date falling 33 months after the Key Date exceeds RMB 180 billion, it has to redeem 30% principal on the 36^th month

• The company has the right to redeem an amount up to the issue size of Additional New Bonds at 83.3% of bond’s face value (plus accrued interest), on or before the 12^th month

The details of New Convertible Bonds are listed below (see Table 2).

Table 2: New Convertible Bonds

• The company is required to redeem extra principal on certain dates if it reaches a set of designated sales target:

• If the contracted sales from 1 January 2023 to the date falling 9 months after the Key Date exceeds RMB 120 billion, it has to redeem 3% principal on the 12^th month
• If the contracted sales from 1 January 2023 to the date falling 21 months after the Key Date exceeds RMB 160 billion, it has to redeem 6% principal each on the 24^th and 30^th month
• If the contracted sales from 1 January 2023 to the date falling 33 months after the Key Date exceeds RMB 180 billion, it has to redeem 20% principal on the 36^th month

• The company can redeem the convertible bond in part or in full at face value (plus accrued interest) at anytime
  

Zhongliang has also proposed some credit enhancement measures, including the use of designated projects (mostly residential projects in Mainland China) as asset package. If the net consideration from the sale of the listed items exceeds RMB 400 million, 50% of the amount shall be used for the cash sweep repayment of the New Bonds and New Convertible Bonds within 3 months.

Commentary

We think the restructuring plan proposed by Zhongliang is very sincere, given that both the tenor and simplicity are much better than the plans published by other developers. It also does not feature any form of alternate haircut such as a mandatory debt-to-equity conversion.

In simple, the New Bonds will have a higher coupon rate and a superior repayment schedule, as well as an extra 6% principal, but it is not entitled to the equity conversion option provided by the New Convertible Bonds. Therefore, bondholders have to make decision based on the need of cashing out by equity conversion in the next few years.

Based on the current share price of Zhongliang (HKD 0.41 per share), unless it can double up in next one to two years, otherwise the creditors will suffer a loss even if we calculate it using the lowest Reset Conversion Price (HKD 0.8 per share). However, although it is true that the New Bonds will receive more than the New Convertible Bonds if Zhongliang can really make repayments over the next few years, the holders of New Convertible Bonds creditors can still recover the principal and collect the interest, given that the conversion right is in their hands. On the contrary, if the company is not doing well, the flexibility of holding the New Convertible Bonds will be much higher.

Considering the principal amount held by the major creditors who have participated in the agreement, as well as the decent terms offered by the plan, we believe it is likely that Zhongliang can achieve more than 75% participation rate in the restructuring support agreement.