Kwok’s dim sums

Will Kaisa become first property firm to default on an offshore bond?

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Kaisa chief: Kwok Ying-shing

For Agile’s investors, Chen Zhuolin’s release was a timely gift from Santa. After two months of house arrest, which led to speculation that the chairman of the real estate developer was being investigated for graft, Chen was released in mid-December and resumed his role in the company. Although there was no official explanation for his custody, investors were relieved, sending Agile’s shares up 15% in Hong Kong after his release.

But even before Chen’s house arrest, the boss of another property firm was also missing in action. In November Kwok Ying-shing, chairman and co-founder of Kaisa, a developer also based in Guangdong, was rumoured to be involved in the investigation into Jiang Zunyu, a senior Party official in Shenzhen (Jiang was arrested in October on suspicion of bribery). Kaisa denied the news, though a month later, Kwok announced his surprise resignation due to “health reasons”. Subsequently, the company’s chief financial officer and vice chairman both also quit.

The developer, which is listed in Hong Kong, has projects in more than 30 cities though it is most active in Shenzhen as well as Guangzhou and Dongguan. Its developments include large-scale residential communities, high-end apartments and also commercial industrial parks.

But the absence of the company chairman and key executives quickly prompted lenders to demand that Kaisa repay a HK$400 million ($51.6 million) loan due on December 31. But the developer said it wouldn’t be able to come up with the money. “As at the date of this announcement, the company has failed to repay the outstanding facility. The company is assessing the impact of the default on other loan facilities, which may trigger cross-default,” Kaisa said in a statement last month.

So what’s going on? Even before all the resignations of Kaisa’s key executives, it appears that not all was well. The Paper, an internet newspaper backed by the Shanghai government, reported that as early as November, the Shenzhen government had blocked the developer from selling new projects. The reason for the suspension is unknown, though industry insiders speculate that the move was politically-driven and related to Jiang’s investigation.

National Business Daily says that while Jiang was in office, Kaisa was awarded several important redevelopment projects within Shenzhen, converting old buildings into modern residential and commercial complexes – including Shenzhen Dapeng Kaisa Peninsula Resort, Shenzhen Kaisa Yuefeng Garden and Shenzhen Kaisa Central Plaza. The three developments, which have since been blocked from being sold, were forecast to contribute one fifth of the company’s annual sales budget.

Moreover, right before his resignation, Kwok reduced his stake to 49% after selling 11.2% of the company’s issued share capital for $220 million to Shenzhen-based insurer Sino Life, which in turn saw its stake rise to around 30%, rendering it the second largest shareholder in Kaisa.

Meanwhile, Kaisa’s trouble continued to worsen this week, with two of its project partners accusing the Shenzhen-based company of breaching its obligations with regard to project partnerships. As a consequence they were demanding Rmb1.2 billion ($196 million) in refunds from the troubled developer. On the bond market, the developer’s $800 million of notes due 2018 and sold to investors at par in March 2013 tumbled to 33.3 cents on the dollar (trading of Kaisa’s shares in Hong Kong has remained suspended since December 24). CBN also published reports saying on Wednesday that the company has entered restructuring (Kaisa denied it).

“The events clearly involved political factors, so it is hard to come to an objective conclusion by just looking at the financial data,” one analyst told Hong Kong’s Apple Daily.

Kaisa’s crisis comes at a time when a great number of Chinese property developers have lavishly tapped offshore lenders for funds. US dollar loans issued to Chinese property borrowers rose four-fold (versus 2010) to $4.6 billion in 2014, calculates Dealogic. But if Kaisa does go bankrupt, it will have an impact that stretches well beyond the property sector. Insurer Sino Life will likely take a big hit too…

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