Asia Fixed Income Analyst

Derek Silva

Credit

Since their introduction less than a decade ago, there has been much discussion and little evidence about the enforceability of the ‘keepwell’ deed in many Chinese USD corporate bonds. And, given that the biggest issuer of keepwell bonds in 2020 is Evergrande’s Hengda Real Estate, it remains as relevant as ever. Until recently, the structure had yet to be put to the test in any prominent distressed cases.  A high-profile case in 2020 seemed to have changed that. In recent months, investors and analysts have closely followed the situation with PKFounder, a distressed issuer with a keepwell bond. And it didn’t look good for keepwell bondholders: The<a href="https://www.reuters.com/article/china-bond-keepwell/administrator-for-chinas-pufg-rejects-keepwell-deed-for-300-mln-bond-redd-idINL4N2FP01J" target="_blank" rel="noopener"> judgement rejected the bondholders' claims</a>, seemingly solidifying the argument for those who said the structure was little more than a gentleman’s agreement and provided a false sense of security.  But now there’s been a new legal decision from a smaller case that contradicts the PKFounder decision. Which brings to mind something important to remember: the concept of legal precedent is not as powerful in China as it is elsewhere. In the other case, Mainland company CEFC had an offshore subsidiary which also issued keepwell bonds and, this month, the Shanghai Financial Court ordered the company to pay a bondholder on account of the keepwell deed. In the following sections, we take a closer look at the specifics. And, while there is no firm conclusion about the enforceability of a keepwell deed, the latest news shows that the situation is not cut-and-dry and the keepwell feature in bonds might not be worthless after all.<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/171/416/original/Screenshot%202020-11-14%20at%2011.21.07.png?1605330171" class="editor-image img-responsive" data-smartkarma-image-id="171416"></figure><div class="content-caption">Source: https://events.debtwire.com/apchart-of-the-week-keepwells-back-19-of-chinese-hy-bonds-ytd-while-pkfounder-cefc-bring-structure-on-focus</div></section></section>

Since their introduction less than a decade ago, there has been much discussion and little evidence about the enforceability of the ‘keepwell’ deed in many Chinese USD corporate bonds. And, given that the biggest issuer of keepwell bonds in 2020 is Evergrande’s Hengda Real Estate, it remains as relevant as ever. Until recently, the structure had yet to be put to the test in any prominent distressed cases.  A high-profile case in 2020 seemed to have changed that. In recent months, investors and analysts have closely followed the situation with PKFounder, a distressed issuer with a keepwell bond. And it didn’t look good for keepwell bondholders: The judgement rejected the bondholders' claims, seemingly solidifying the argument for those who said the structure was little more than a gentleman’s agreement and provided a false sense of security.  But now there’s been a new legal decision from a smaller case that contradicts the PKFounder decision. Which brings to mind something important to remember: the concept of legal precedent is not as powerful in China as it is elsewhere. In the other case, Mainland company CEFC had an offshore subsidiary which also issued keepwell bonds and, this month, the Shanghai Financial Court ordered the company to pay a bondholder on account of the keepwell deed. In the following sections, we take a closer look at the specifics. And, while there is no firm conclusion about the enforceability of a keepwell deed, the latest news shows that the situation is not cut-and-dry and the keepwell feature in bonds might not be worthless after all.Source: https://events.debtwire.com/apchart-of-the-week-keepwells-back-19-of-chinese-hy-bonds-ytd-while-pkfounder-cefc-bring-structure-on-focus

Keepwells: Not Dead Yet - There Might Be Some Protection After All?

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Stories appeared Thursday in China talking about (and showing a picture of) a purported letter from <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> to the Guangdong government dated 24 August asking for assistance in restructuring. The letter is reported to have said that its cashflow would be endangered because of a need to repay RMB 130 billion to strategic investors by end January 2021 if Evergrande did not achieve a backdoor listing of its principal mainland subsidiary Hengda Real Estate (which it has been trying to do for three years by injecting Hengda into Shenzhen-listed Shenzhen Special Economic Zone Real Estate &amp; Properties Group Co. Ltd.), and such asset sales and lack of ability to raise debt would impair the smooth functioning of the real estate and loan market. The letter asks for assistance in moving forward the listing plan, despite the fact that this would break the informal ban on listing new real estate companies on local exchanges.I refer to media reports about this story in <a href="https://www.bloomberg.com/news/articles/2020-09-24/evergrande-warns-of-looming-liquidity-crunch-spooking-investors" target="_blank" rel="noopener">Bloomberg</a>, <a href="https://www.caixinglobal.com/2020-09-25/china-developer-evergrande-denies-its-seeking-government-support-101609336.html" target="_blank" rel="noopener">Caixin Global</a>, <a href="https://uk.reuters.com/article/china-evergrande/chinas-no-2-developer-evergrande-pleads-for-government-support-to-avoid-cash-crunch-idINL3N2GL2H9" target="_blank" rel="noopener">Reuters</a>, and others about the purported letter.Evergrande issued a SOLEMN DECLARATION via the HKEX Friday night. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/716/original/Screenshot%202020-09-25%20at%2012.30.05%20PM.png?1601008218" class="editor-image img-responsive" data-smartkarma-image-id="161716"></figure>The story introduced a fair bit of volatility in trading Friday 25 September 2020. The shares fell early, rose to be +6% on the day, then fell sharply - at one point -14.6% on the day.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/161/768/original/Screenshot%202020-09-25%20at%208.28.09%20PM.png?1601036926" class="editor-image img-responsive" data-smartkarma-image-id="161768"></figure>194.7 million shares traded. That is the highest in more than 3 years, and represents over 13% of the Real World Float of the company. The stock ended down 9.5% on the day. <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">China Evergrande New Energy Vehicle Group (708 HK)</a> was down 13% on Friday. The whole China real estate developer sector listed in Hong Kong fell in a sea of red. Bloomberg <a href="https://www.bloomberg.com/news/articles/2020-09-25/evergrande-faces-crisis-of-confidence-over-120-billion-debt?sref=ZEpEDN5v" target="_blank" rel="noopener">reported</a> the dollar bonds of Evergrande were the worst performer in the Bloomberg Barclays Asia Dollar Bond index. And the domestic bonds fell sharply, with a yuan bond due 2022 falling 18% to RMB 77.7 and a 2024 dropping 30% to 65.9 yuan, with trading reportedly suspended. The company came out again on Friday to say that business was doing OK. But clearly, some people see an issue.Much more below the fold.<div></div>

Stories appeared Thursday in China talking about (and showing a picture of) a purported letter from Evergrande Real Estate Group (3333 HK) to the Guangdong government dated 24 August asking for assistance in restructuring. The letter is reported to have said that its cashflow would be endangered because of a need to repay RMB 130 billion to strategic investors by end January 2021 if Evergrande did not achieve a backdoor listing of its principal mainland subsidiary Hengda Real Estate (which it has been trying to do for three years by injecting Hengda into Shenzhen-listed Shenzhen Special Economic Zone Real Estate &amp; Properties Group Co. Ltd.), and such asset sales and lack of ability to raise debt would impair the smooth functioning of the real estate and loan market. The letter asks for assistance in moving forward the listing plan, despite the fact that this would break the informal ban on listing new real estate companies on local exchanges.I refer to media reports about this story in Bloomberg, Caixin Global, Reuters, and others about the purported letter.Evergrande issued a SOLEMN DECLARATION via the HKEX Friday night. The story introduced a fair bit of volatility in trading Friday 25 September 2020. The shares fell early, rose to be +6% on the day, then fell sharply - at one point -14.6% on the day.194.7 million shares traded. That is the highest in more than 3 years, and represents over 13% of the Real World Float of the company. The stock ended down 9.5% on the day. China Evergrande New Energy Vehicle Group (708 HK) was down 13% on Friday. The whole China real estate developer sector listed in Hong Kong fell in a sea of red. Bloomberg reported the dollar bonds of Evergrande were the worst performer in the Bloomberg Barclays Asia Dollar Bond index. And the domestic bonds fell sharply, with a yuan bond due 2022 falling 18% to RMB 77.7 and a 2024 dropping 30% to 65.9 yuan, with trading reportedly suspended. The company came out again on Friday to say that business was doing OK. But clearly, some people see an issue.Much more below the fold.

Evergrande May Be Facing a Funding Squeeze

Equity Research in HK and Mainland China

Li Tang

Thematic (Sector/Industry)

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation, property construction and sales activity are coming back, especially in upper-tier cities in leading city clusters as the industry is benefiting from plentiful liquidity and relaxation of residency permits fed a demand surge in June.
<ul class="" type="disc">
<li>The China Index Academy data from 100 cities showed that house prices in June rose at the fastest pace since Sep 2017.</li>
<li>Sales of China's leading property developers saw robust growth.</li>
<li>30 cities monthly sales surged to 2019 peak level.</li>
</ul>
The 2020 Government Work Report has more positive wording towards the property market this year. It called for city-level policy adjustments to promote “steady and healthy development of the real estate market”, under the principle of “houses are for living in, not speculation”. On the other hand central government still refrains from using the real estate sector as a short-term stimulus. We believe the government will continue to take a restrained approach to short-term economic stimulus both compared with other major economies and with China's 2009 stimulus. In other words, the policy goal is for the property sector to support the economy, while avoiding excessive home price rises and debt risk. As market conditions differ city to city, local governments are tasked with setting local property policy accordingly.

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation, property construction and sales activity are coming back, especially in upper-tier cities in leading city clusters as the industry is benefiting from plentiful liquidity and relaxation of residency permits fed a demand surge in June.

The China Index Academy data from 100 cities showed that house prices in June rose at the fastest pace since Sep 2017.
Sales of China's leading property developers saw robust growth.
30 cities monthly sales surged to 2019 peak level.

The 2020 Government Work Report has more positive wording towards the property market this year. It called for city-level policy adjustments to promote “steady and healthy development of the real estate market”, under the principle of “houses are for living in, not speculation”. On the other hand central government still refrains from using the real estate sector as a short-term stimulus. We believe the government will continue to take a restrained approach to short-term economic stimulus both compared with other major economies and with China's 2009 stimulus. In other words, the policy goal is for the property sector to support the economy, while avoiding excessive home price rises and debt risk. As market conditions differ city to city, local governments are tasked with setting local property policy accordingly.

China New Home Sales Turn Positive As Major Property Developers See Rising Sales in June

Founder-CEO & Chief Analyst, Real Estate Foresight

Robert Ciemniak

Founder-CEO & Chief Analyst

Real Estate Foresight

Since 2012, REF has been helping investors with market research, project due diligence, and strategy development. This has ranged from detailed assessments and estimates on distressed developers' project portfolios to market due diligence on specific projects to macro-level questions linked to demand for commodities. The unique combination of the housing markets and developer data from data partner China Index Academy in Beijing, primary research, and technology-powered alternative data collection from public sources result in a valuable content set used in REF analytics and reports.

Predictive Analytics for China Property

18 months ago, in <a href="https://www.smartkarma.com/insights/china-property-a-turning-point-for-the-sunny-sanya-and-hainan-island" target="_blank">"China Property: A Turning Point For The Sunny Sanya And Hainan Island?"</a>, we talked about a turning point and upside for the Sanya housing market. Measured by the official NBS house price growth indices, the city of Sanya on Hainan Island (the "Chinese Hawaii") is as of July 2018 the top performing city in terms of the house price growth on a 12-month and on a 3-month basis, benefiting from the policy support for Hainan, yet subject to a range of sales and price restrictions locally. We look at the key data and drivers at the city level to illuminate the local market dynamics and near-term outlook, as well as what caveats it brings to the widely watched 70-cities price growth index, from a macro perspective.

18 months ago, in "China Property: A Turning Point For The Sunny Sanya And Hainan Island?", we talked about a turning point and upside for the Sanya housing market. Measured by the official NBS house price growth indices, the city of Sanya on Hainan Island (the "Chinese Hawaii") is as of July 2018 the top performing city in terms of the house price growth on a 12-month and on a 3-month basis, benefiting from the policy support for Hainan, yet subject to a range of sales and price restrictions locally. We look at the key data and drivers at the city level to illuminate the local market dynamics and near-term outlook, as well as what caveats it brings to the widely watched 70-cities price growth index, from a macro perspective.

China Property - Sanya And Hainan Island Are The Hottest Yet Very Restricted Housing Markets

We look at the data and specific cases of the failed land auctions in China that raise a question as to whether we are witnessing a turning point in the property market on the supply side. We pick a number of specific land auctions as examples and look in greater depth at what may have happened in those cases and what it may signal for the market overall.

We look at the data and specific cases of the failed land auctions in China that raise a question as to whether we are witnessing a turning point in the property market on the supply side. We pick a number of specific land auctions as examples and look in greater depth at what may have happened in those cases and what it may signal for the market overall.

China Property: Does The Increase In Failed Land Auctions Signal Anything?

China

Greenland Holdings Corp., Ltd. provides real estate sales, exchange, rental, evaluation, consulting, maintenance, green projects, and energy services.

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Greenland Holdings Corp (600606 CH)

Keepwells: Not Dead Yet - There Might Be Some Protection After All?

Investors increasingly believe Keepwell deeds are worthless after the PKFounder legal decision this year. But a more recent case seems to...

Derek Silva

Evergrande May Be Facing a Funding Squeeze

Stori

Travis Lundy

China New Home Sales Turn Positive As Major Property Developers See Rising Sales in June

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation,...

Li Tang

China Property - Sanya And Hainan Island Are The Hottest Yet Very Restricted Housing Markets

18 months ago, in "China Property: A Turning Point For The Sunny Sanya And Hainan Island?", we talked about a turning point and upside for the...

Robert Ciemniak

China Property: Does The Increase In Failed Land Auctions Signal Anything?

We look at the data and specific cases of the failed land auctions in China that raise a question as to whether we are witnessing a turning point...

Robert Ciemniak

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)