HONG KONG (S&P Global Ratings) June 7, 2023--China's distressed developers seemingly cannot get a break. In the most recent development, a batch of entities are facing delisting from domestic exchanges after equity holders pushed stock prices below Chinese renminbi (RMB) 1.
S&P Global Ratings believes delisting would reduce the restructuring options available to shareholders and creditors, increasing the likelihood of the worst-case scenario: liquidation.
The Shanghai and Shenzhen exchanges delist firms that trade below RMB1 per share for 20 consecutive trading days.
The 11 firms at risk of delisting collectively have US$21 billion-equivalent in bonds outstanding, onshore and offshore. Our empirical study shows investors typically get about 2-4 cents on the dollar in liquidation.
Liquidation wipes out equity holders and terminates jobs at the failed firm. Homebuyers are then at high risk of not getting the homes for which they prepaid, unless the construction is finished by other parties. This is the worst outcome for most.
"Delisting adds strain to a sector that has had a really difficult couple of years," said S&P Global Ratings credit analyst Esther Liu. "The event closes options for Chinese developers to recover, and for investors to get their money back."
In the most recent example, the Shanghai Stock Exchange on Tuesday delisted Sichuan Languang Development Co. Ltd. The developer has about US$2.7 billion-equivalent in bonds outstanding.
Most of the China property firms facing delisting are distressed. The delisting event will complicate restructuring talks for these reasons:
- Creditors will be less willing to accept nontradable shares, making a debt-for-equity swap a less likely tool in any restructuring.
- A delisting would reduce the equity value held by the founding shareholders, making them less motivated to stay involved with the firm through an out-of-court restructuring. This could push the entity toward a court-led reorganization (in-court reorg).
- A delisting would hit market confidence in the firm, making it difficult to restructure debt; this would also discourage parties from seeking an out-of-court restructuring.
- If the company used its cash to support the stock price to avoid delisting, then it would have less cash available for debt repayment.
COURT-LED RESTRUCTURINGS: THE SLOW ROAD TO REORG
Delisting makes it difficult to carry out an out-of-court restructuring, or the reorg outcome that would give a firm the best chance of survival.
In-court reorgs can take years, and lenders/investors typically receive far less than would be achieved in direct workout talks between the issuer and creditors.
For example, Goocoo Investment Co. Ltd. defaulted in 2018. The court only approved its bankruptcy restructuring plan in December 2021. The restructuring proposal shows that the senior unsecured creditors immediately receive only 5% of money owed, along with equity (via a debt-equity swap) and debt with extended maturities. Creditors can alternately opt for a 50% haircut if choosing repayment by a combination of cash and assets (see "China's Defaulted Developers Are Running Out Of Time To Exchange And Extend," July 18, 2022.
"While Chinese courts have made much progress recently making bankruptcy proceedings more efficient, many investors seek to avoid the process. Offshore funds in particular prefer to directly negotiate a workout with the issuer, on the view they can recover more money this way," said China country specialist Chang Li.
For those creditors unwilling to wager on an in-court reorg, the likely next step is liquidation.
Issuers and creditors are trying to salvage the best of the China property sector. Both parties have strong incentives to return firms to solvency, and back as a going concern.
Delistings raise the possibility of a liquidation. This is the definition of a failed restructuring, and it would be a setback for the market and the economy.
Writing: Jasper Moiseiwitsch
This report does not constitute a rating action.
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|Primary Credit Analyst:||Esther Liu, Hong Kong + 852 2533 3556;|
|China Country Specialist:||Chang Li, Beijing + 86 10 6569 2705;|
|Secondary Contact:||Lawrence Lu, CFA, Hong Kong + 85225333517;|
|Media Contacts:||Ning Ma, Hong Kong (852) 2912-3029;|
|Michelle Lei, Beijing + 86 10 6569 2961;|
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