Kaisa Bondholders Move to Protect Investments
Law Firm Brings Together Bondholders After Kaisa Said it Defaulted on Offshore Debt
By FIONA LAW and ESTHER FUNG
HONG KONG—A law firm says it has brought together a group of Kaisa Group Holdings Ltd.’s offshore bondholders to help protect their investments after the troubled Chinese property company failed to meet an interest payment.
The move comes as onshore creditors are also seeking to freeze assets of Kaisa. The company said late Monday it hadn’t paid a scheduled interest payment of $23 million on an offshore bond, triggering worries among foreign debt investors who have little protection when companies on the mainland go bust.
Kirkland & Ellis LLP has gathered investors holding more than 30% of one of Kaisa’s bonds, and is currently organizing holders of the other five bonds to reach the threshold for legal action, according to a person familiar with the situation. Big global funds and distressed assets management firms are in the group, the person said.
Investors holding 25% of the outstanding amount of bonds can take enforcement action against the company, according to Kaisa’s bond prospectus.
Currently, the investor group isn't taking action yet. “We and our clients believe that the company needs a little bit of time and breathing space so that it can obtain appropriate professional advice and try to stabilize the situation,” said Neil McDonald, a restructuring partner of the law firm who has previously advised creditors of Sino-Forest Corp. and Bumi Resources. The law firm is still talking to more investors to bring them into the group.
More than two dozen foreign fund companies, ranging from BlackRock Inc. to Fidelity Investments and Lion Global Investors, owned Kaisa debt in recent months, according to Thomson Reuters, although it isn’t clear how many currently hold the debt. BlackRock and Fidelity have declined to comment, while a spokesperson for Lion Global, a Singapore-based fund company, said it has sold its holdings. It is unclear whether these funds are involved in the investor group.
The company is the biggest casualty so far among property companies in China and it surprised investors as it was seemingly in good financial shape despite a slowing housing market and softer economic growth in the country. Kaisa has also struggled with senior executives leaving while the Shenzhen government has blocked approvals of some of its developments and property sales in the city.
Investors welcomed Kaisa’s statement on Monday saying it is looking to appoint a financial adviser to help with its troubles, and said HSBC Holdings PLC had granted it a waiver on a $51.6 million loan, meaning Kaisa doesn’t have to repay the loan for now. Kaisa’s offshore bond prices rebounded on Tuesday to 44-49 cents on the dollar, after tumbling 80% over the past month to around 30 cents.
The company has also shortlisted two banks as financial advisers—Jefferies and Houlihan Lokey, two people familiar with the situation said. Kaisa said on Monday it will make a decision shortly, and efforts to reach the company Tuesday were unsuccessful.
“The appointment of a financial adviser is important given that many (creditors) have taken action and many of the company’s projects are now affected,” said Charles Macgregor, Asia head at credit-research firm Lucror Analytics.
Still, questions remain unanswered on whether or when the sales and development of Kaisa’s projects in Shenzhen will be unlocked and how the company will handle onshore creditors’ pressing demand to refund.
Kaisa said Monday it has received notices from its creditors demanding immediate repayment on their debts. Several bank accounts of the group have been frozen, with a total bank balance of 713 million yuan (US$115 million), the cash-strapped firm said late Monday.
At least 17 financial firms, including banks, four trust firms, and a wealth management company, have asked a court in Shenzhen to freeze Kaisa’s assets.
“It is a rush to cash out. The first creditor makes a move and others will follow so that they won’t lose out if there is any settlement negotiation,” said Alex Wang, Shanghai managing partner at global law firm Dentons. “It is a pretty ugly situation.”
It is also especially worrying for overseas investors as they get paid long after domestic investors and have no direct access to assets on the mainland because of capital restrictions.
“We don’t like to see onshore creditors take self-help actions to freeze assets in China as that will destroy the value of the company’s assets,” said Mr. McDonald, who represents debtors offshore. “If they push too far, it might force the company to seek some form of bankruptcy protection and lead to an onshore liquidation. That wouldn't be in anyone’s interest.”
He also said if Kaisa isn't acting to protect all creditors’ interest, it will lead the group of foreign bondholders to try to take control of Kaisa’s offshore subsidiaries and reach out to its onshore assets. “We would only do this as a last resort and we really hope that this won't be necessary,” he said.
The best scenario is for the group to work with Kaisa and try to come up with a “consensual solution” that benefits all stakeholders, including both onshore and offshore creditors, he said.
Write to Fiona Law at fiona.law@wsj.com and Esther Fung at esther.fung@wsj.com