HONG KONG: China's property market has too much property and too little market. The murky rescue of developer Kaisa makes that imbalance a little worse.
The Shenzhen-based group is a study in high-speed failure. In the past two months it was blocked from selling some properties by local authorities, defaulted on a loan, and lost most of its senior executives. Now there may be a white knight. Rival Sunac has bought a 49 percent stake from Kaisa's outgoing chairman, according to a filing in Hong Kong, where both companies are listed. Under local rules, that is likely to trigger a full takeover offer.
Tentatively, this is a win for foreign bondholders. A change of leadership may not bring in new capital, but could help Kaisa schmooze away some of its political problems. The combined company would have a cash of $4.3 billion, based on last-published figures from June 30, after deducting the implied $1.2 billion that Sunac would have to fork out for a full takeover at the same price it paid for its stake. That's more than enough to cover $23 million of missed interest payments. Sunac, which has $1.3 billion of offshore bonds outstanding, has little to gain from ignoring overseas bondholders' claims.
Yet the white knight comes with a grey cloud. Even as Sunac bought in, Kaisa spent $30 million on the seemingly unrelated purchase of a minority stake in a project from a partner, Zhongrong Trust. That sends a message to offshore creditors that they are not just subordinate to onshore lenders, but joint venture partners too. There remains the mystery over why Kaisa, which had $1.8 billion of cash on its balance sheet in June, recently sold assets to Sunac for $380 million to raise working capital.
This is a problem deferred, not solved. Sunac's quest for scale looks brave, since the underlying property market is still weak. Bondholders may get their money back, but more through luck than judgment. While there will be many more distressed developers, there may not be enough white knights to go around.
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