Delivering a solution
Sunac China Holdings’ offshore debt restructuring was a landmark for China’s struggling property sector, as the defaulted developer was able to negotiate and complete a major restructuring in an effective and efficient manner.
As offshore restructurings from the Chinese property sector struggled, Sunac broke the deadlock and was the first residential developer to cut leverage by incorporating an element of equity conversion.
The borrower was ready to offer flexible terms to meet different investor needs, and its chairman’s commitment to sharing the burden helped the restructuring proceed quickly. Following a default in May 2022, a restructuring plan was presented in March 2023 and the restructuring was completed in November.
Sunac, which like most Chinese developers has limited offshore assets, found a way to satisfy its more than 2,000 creditors by providing a number of options. It proposed to swap its US$10.2bn of offshore debt into a combination of senior unsecured notes, mandatory convertible bonds, convertible bonds and ordinary shares.
Banks and long-only funds who could not or did not want to hold shares could take the senior notes. Hedge funds could choose the equity option to benefit from potential upside from the company’s recovery, while helping it to deleverage.
The plan gives Sunac three years to focus on its business recovery without worrying about debt repayment. The new senior notes have tenors of between two and nine years, with a one-year extension option for the short-dated notes. The interest for the first two years can be paid in kind.
Key to the success was Sunac chairman Sun Hongbin’s commitment to getting the deal done, which was shown in the treatment of his US$450m shareholder loan. The loan was converted into MCBs under the same terms as creditors, and those MCBs are subordinated to other debt instruments issued to creditors.
To further assuage creditors, Sunac provided a credit enhancement by agreeing that the proceeds from disposals of certain assets, including onshore projects and shares in Hong Kong-listed Sunac Services Holdings, will be used to repay bonds. To align with the Chinese government’s focus on delivering homes, the plan carved out an amount for housing developments, and the company will use different ways, including raising new funding from the projects, to ensure the proceeds will be paid to offshore creditors.
The scheme ultimately replaced the offshore debt with US$6.26bn of notes with maturities as far off as 2031, US$1bn of convertible bonds and US$2.65bn of mandatory CBs.
Houlihan Lokey (China) was the financial adviser to the company. Sidley Austin was the legal adviser. PJT Partners and Linklaters advised an ad hoc group of bondholders.
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