Chinese real estate companies, including Country Garden (碧桂园), are facing potential setbacks in their debt restructuring efforts as the government has blocked the issuance of forced conversion bonds. This financial instrument is crucial for reducing offshore debt, and its prohibition could hinder the recovery of a real estate market burdened by defaults totaling 174 trillion won.
On September 9, Bloomberg reported, citing sources, that the China Securities Regulatory Commission (CSRC) has rejected applications for the issuance of forced conversion bonds from defaulting real estate developers, including Country Garden and Sino-Ocean Group (远洋).
Country Garden plans to issue $13 billion (approximately 17 trillion won) in offshore forced conversion bonds as part of a debt restructuring plan that took effect at the end of last year. Some of these bonds have already been issued, but the company received notification from the CSRC weeks ago that it could not submit its application.
The CSRC cited Country Garden's classification as an ineligible defaulting company due to its default status and regulatory violations. Sino-Ocean also intended to issue forced conversion bonds during its offshore debt restructuring but reportedly received a similar notification.
Forced conversion bonds are financial products that convert debt into equity if certain conditions are met. For companies, this allows them to reduce principal and interest burdens while bolstering capital, thus improving their financial structure.
With defaults in the Chinese real estate sector reaching approximately $130 billion (about 174 trillion won), forced conversion bonds have become a key restructuring tool for companies seeking to alleviate their debt burdens and pursue recovery.
In practice, companies like Country Garden, Sino-Ocean, Longfor Group (龙光), Shimao, CIFI, and others are in the process of restructuring their debts by issuing forced conversion bonds, aiming to reduce principal amounts to around 20-30% of their original debts.
Previously, Chinese real estate firms could issue offshore forced conversion bonds without prior approval from the CSRC, only needing to report after issuance. However, the CSRC has now refused to accept related applications altogether. Bloomberg noted that with multiple regulatory agencies involved, it remains unclear who would be held accountable if issues arise with the forced conversion bonds.
This situation could disrupt not only the execution of existing debt restructuring plans but also the development of new restructuring proposals. If this measure is not a one-time occurrence, real estate firms may need to pivot to other methods, such as extending maturities, reducing principal amounts, or directly allocating shares to existing shareholders or creditors.
The prospects for recovery among Chinese real estate firms may diminish further. Bloomberg indicated that companies already in debt restructuring may need to renegotiate their agreements with offshore creditors, which could extend the restructuring period and lower creditors' recovery expectations, ultimately constraining the firms' financing capabilities and operational flexibility.
Jiang Huaiyu, a senior analyst at Mingzhe Capital in Hong Kong, told the Hong Kong Ming Pao that it is still unclear whether Bloomberg's report is accurate. He noted that some Chinese real estate companies are already in the midst of debt restructuring, and it is difficult to understand why regulatory authorities would suddenly halt the issuance of forced conversion bonds. He expressed hope that this issue would remain limited to a few individual cases, stating, "If true, it would have very negative implications, complicating companies' debt restructuring efforts."
* This article has been translated by AI.
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