Recruiting in China

Indebted firm may solve its problems on its own

Tianjin-based developer Sunac China Holdings announced Thursday morning that it has decided to terminate the offer to acquire a stake in heavily indebted developer Kaisa Group Holdings because "certain conditions precedent have not been fulfilled."

Kaisa later on Thursday also announced the termination on the Hong Kong bourse, but it did not offer details on how it will deal with its debts and whether it is searching for a new acquirer.

On February 6, Sunac announced the offer to acquire a 49.3 percent stake of Kaisa for the price of HK$4.55 billion ($587 million), which was considered a lifeline for the troubled company.

However, Kaisa had to meet some conditions in order to proceed with the deal. Kaisa's debt defaults needed to be resolved, its debts had to be restructured and all irregularities in Kaisa's operations needed to be resolved, according to a filing from Sunac on the Hong Kong bourse on February 6.

Under the termination agreement, Kaisa will now have to refund HK$1.16 billion, half of Sunac's pre-payment, to Sunac before Friday and the rest before December 28, which may be a challenge for the indebted firm, analysts said.

Efforts to reach Kaisa failed as of press time.

Shenzhen-based Kaisa has defaulted on some of its debt payments in the past few months, which is partly the reason why its acquisition deal has drawn much attention, according to analysts.

Kaisa announced on April 20 that it had failed to pay $51.6 million in interest due from two offshore bond notes, becoming the first domestic company default in the offshore bond market.

The company also said it failed to pay a HK$400 million loan from HSBC in January. Kaisa said in a filing in February that its interest-bearing debts had reached 65 billion yuan ($10.48 billion) by the end of 2014.

"I think Kaisa may be seeking to resolve its debt problems on its own [after the deal termination], as the country's overall property market is warming up, which may help improve the company's cash flow," Wang Danqing, a partner at Beijing-based ACME Consultancy, told the Global Times on Thursday.

The central bank has cut the interest rate twice since the beginning of this year, which is also good news for indebted developers, Wang noted.

There were early signs hinting at the possible termination of the deal.

Media had reported on May 26 that Kwok Ying-shing, Kaisa's chairman, had reported to the Hong Kong securities authorities about irregularities in Sunac's acquisition.

The move, if true, showed Kwok's reluctance to sell the stake to Sunac, analysts said.

Kwok resigned from Kaisa as its chairman in December for "health" reasons after he was reportedly involved in an anti-corruption probe against Jiang Zunyu, a former senior Party official in Shenzhen. But Kwok reclaimed the position in April.

Li Zhanjun, an analyst from Shanghai-based housing market research firm E-house China, also said that Kaisa may seek to solve its debt problems on its own, otherwise "it would have held on to Sunac's acquisition offer."

This is not the first time that Sunac is seeking to acquire a developer as it looks to expand in southern China.

Sunac proposed to acquire Hangzhou-based developer Greentown China Holdings in May 2014, but the deal was also terminated in December.

"Sunac's offer to acquire the two companies played a crucial role in helping them [Kaisa and Greentown] weather the tough times," Li told the Global Times Thursday, as the pre-payment may have improved their cash flow.

But analysts said it is still too early to say that Kaisa is out of trouble now. Finance news portal yicai.com reported Thursday that Kwok is negotiating with overseas creditors on debt restructuring plans.

Kaisa still has not released its 2014 financial report.

Earlier media reports said that serious irregularities may have been the reason for the delay.

Sunac's shares on the Hong Kong bourse dropped 5.73 percent after trading resumed on Thursday. Trading in Kaisa shares was still halted Thursday.