Sunac to extinguish offshore debt
Published 25 April 2025, 13:22
By Pan Yue
Sunac China Holdings, the first major Chinese property developer to complete a debt restructuring following the wave of defaults that began in 2021, has set out the terms of a new plan that would see it convert all of its offshore debt into mandatory convertible bonds.
It is offering to exchange US$9.55bn of debt into two MCBs, which would make it the first Chinese property developer to do an all debt-to-equity swap.
The developer released the details on April 17, ahead of an April 28 hearing on a winding-up petition filed by China Cinda (HK) Asset Management.
Sunac said the restructuring would “completely address the group’s offshore debt risks and establish a sustainable capital structure”, as well as offer creditors an opportunity to “benefit from near-term liquidity and potential equity upside”, according to a filing to the Hong Kong stock exchange.
Analysts welcomed the new terms, calling the approach healthy as developers become aware that the property sector will not recover to its pre-crisis state.
“It’s not surprising to see Sunac converting all debt to equity to improve its balance sheet,” said Chang Li, a director at S&P. “The market is stabilising but developers still need cash to complete their projects. At this stage, it’s more realistic for developers to cut debt to achieve a sustainable capital structure, rather than squeeze their last available cash and then liquidate. A debt-to-equity swap could be an acceptable solution for all stakeholders.”
The sector has shown some positive signs since last September, when China announced an economic stimulus package which boosted the stock market and consumer confidence. Second-hand home sales are up year on year in top tier cities, and home price declines have narrowed, according to Edward Chan, a director at S&P. He said the inventory in Tier 1 cities has returned to a healthy level that can support home prices.
“Domestic consumption will become a crucial element to support the economy amid US-China trade tensions, and there’s high correlation between domestic consumption and home prices. If supportive policies continue, home prices could stabilise, and consumer confidence could be bolstered,” said Chan.
Lucror Analytics senior credit analyst Leonard Law said “the worst is over” and he also expects China to roll out more stimulus as the country faces external pressures – most notably from US tariffs.
Fastest cash recovery
Sunac is offering a six-month MCB with a conversion price of HK$6.80 (US$0.88) and a 30-month MCB with a conversion price of HK$3.85 under the new restructuring. Holders of the second MCB can start converting it to shares 18 months after either the restructuring effective date or December 31 2025, whichever is earlier, unless the issuer decides to open a conversion window sooner.
Sunac shares were trading at HK$1.75 at midday on Friday.
Law said the recommendation for creditors in Chinese property offshore debt restructurings is always to choose the option that provides the fastest cash recovery, which is usually the equity swap option.
“After converting to equity, you can sell the shares immediately after the vesting period. Whereas the options to get medium-term or long-term debt are akin to kicking the can down the road,” said Law. He said there is a high chance that creditors will approve the proposal.
“The positive development is that we can now see a faster resolution for defaulted offshore bonds, and bondholders have a clearer idea of what the recovery value would be,” he said.
Law wrote in a note on Tuesday that the recovery rates for the two MCBs are estimated to be 8% and 14% respectively based on Sunac’s current market capitalisation. The company's latest market cap is around US$2.3bn, according to LSEG data.
Sunac found strong support for its equity swap in its first restructuring in 2023. About US$2.75bn of MCBs and US$1bn of CBs were sold to exchange existing debt, and US$775m of debt was swapped into Sunac Services’ shares. The cap for the MCBs was raised from the initial US$1.75bn in response to investor interest.
The outstanding principal amounts of the MCBs and CBs are US$97m and US$246m, respectively.
By January this year, Sunac flagged to some creditors that it might have difficulty meeting the first redemption of the restructured notes in September because of a weaker-than-expected recovery in sales.
In the latest restructuring offer, 23% of the new MCBs will be issued to chair and major shareholder Sun Hongbin, allowing him to retain certain voting rights. Sun will be unable to sell the MCBs or shares until the share price reaches HK$7.40, or six years after the restructuring effective date, whichever is earlier.
“Offshore creditors have come to the realisation that the company needs to remain as a going concern to maximise recovery value, as outright liquidation would wipe out any recovery. This means that management are not being punished for their past bad decisions, as offshore creditors have little choice but to allow the main shareholder to retain control of the company,” said Law.
Sunac will also create an employee stock ownership plan and issue up to 7% of the fully diluted share capital to approximately 500 staff members.
Holders of approximately US$1.3bn of offshore debt have agreed to the new restructuring plan, while holders of a further US$1bn have expressed their intention to agree, Sunac said in the filing. The two groups hold approximately 26% of the property developer's outstanding offshore debt.
An early consent fee of 1% will be paid to creditors who agree to the restructuring before May 23 at 5pm Hong Kong time. Those who agree before the final deadline of June 6 will receive a 0.5% fee.
Houlihan Lokey (China) is the restructuring financial adviser and Sidley Austin the restructuring legal adviser to the issuer.
(Additional reporting by Sara Velezmoro)