CIFI restructuring advances as shareholders face massive dilution

The property developer said its restructuring plan, which will give it two years of relief from debt repayments, has gained support from nearly 80% of its creditors

Key Takeaways:

• CIFI has kept interest rates between 2.75% and 3% in its debt restructuring plan, a significant decrease from previous financing costs, and extended the repayment period to nine years
• A compulsory exercise of all the developer’s convertible bonds under the plan will lead to the issue of about 14.9 billion new shares, substantially diluting existing shareholders

By Ken Lo

Tales of talks between debt-heavy Chinese developers and their creditors are aplenty these days, with the two sides often at loggerheads on contentious debt restructuring plans.

But one name possibly leading the way out of the mess is CIFI Holdings (Group) Co. Ltd. (0884.HK) which announced on Oct. 27 that creditors holding about 77.88% of its outstanding debt had formally signed or joined its restructuring support agreement (RSA). The company intends to implement the proposed RSA through a scheme of arrangement that would be executed in Hong Kong

While CIFI isn’t the first cash-strapped property developer to reach such a restructuring deal with its offshore creditors, it is the fastest in its class so far. The restructuring sends a positive signal from such Chinese developers to their offshore creditors, since the company’s offshore debt accounts for as much as 54.2% of CIFI’s total.

According to its financial results for the first half of 2024, CIFI had 88.57 billion yuan ($12.42 billion) in interest-bearing liabilities at the end of June, with offshore senior notes, offshore convertible bonds and foreign currency loans accounting for 28.92 billion yuan, 1.63 billion yuan and 17.43 billion yuan, respectively, or about 48 billion yuan altogether. The RSA will reduce the pressure on CIFI’s cash flow on the one hand, while also dispelling doubts about its ability to continue doing business on the other.

Under Hong Kong rules, the RSA must be approved by creditors holding at least 75% of the company’s debt, and also by a majority of the total creditors present and voting at the creditors’ meeting. The plan can only take effect after the Hong Kong court confirms that the terms are fair and issues an order approving it. Accordingly, CIFI is likely to apply to the court soon for a specific hearing date.

In its Sept. 27 announcement, CIFI said it had reached a consensus with its major offshore creditor group, holding 47% of its $4.55 billion in offshore bonds and 31.1% of its in-scope debt. To encourage more creditors to participate in the restructuring and sign onto the deal, the company even added early bird and general consent fees equal to 0.2% and 0.1% of the claim amount, respectively.

CIFI was able to obtain support from the nearly 80% of its creditors within just one month thanks to its well-balanced restructuring plan, which combines short-, medium- and long-term measures and takes into account the needs of different creditors. Judging from the plan’s five options, CIFI will not need to pay much principal or interest in the first two years after the restructuring takes effect.

In addition, the interest rate for new loans and notes in the restructuring plan is only 2.75%. If terms for bonds are extended, the coupon rate will be 3% in the sixth to ninth years after the plan takes effect, meaning CIFI’s financing cost will be significantly lower than before. Such terms not only relieve the company from short-term pressures on its cash flow but also reduce its financial leverage, improving CIFI’s financial stability in the medium to long-term.

Chinese real estate companies have continued to suffer from tumbling monthly sales this year, with year-on-year declines generally ranging from 40% to 60%. That’s resulting in dwindling cash flow for most companies, which is hurting their flexibility to negotiate debt restructuring with their creditors. CIFI is a case in point, with cash generated from operations in the first half of this year down to just 7.39 billion yuan, versus 12.31 billion yuan in the year-ago period.

Improving sentiment

At a meeting of the Political Bureau of the Communist Party of China’s Central Committee on Sept. 26, the central government rolled out major interest rate cuts and lowered banks’ reserve requirement ratios as part of a bid to bring stability back to the property market. These measures helped restore some confidence to investors, helping to fuel a rally for CIFI’s shares from a low of HK$0.20 in early September to its latest close of HK$0.41 on Wednesday. The changing sentiment may also be helping to move the debt restructuring process along.

CIFI previously stated that the offshore debt restructuring is expected to reduce its debt by $3.3 billion to $4 billion. It’s still worth noting that the latest debt restructuring proposal will require CIFI to issue a large number of new shares, which means existing shareholders will be significantly diluted in the long run.

According to the Sept 27. debt restructuring plan, up to $3.06 billion worth of convertible bonds are eligible for conversion to the company’s stock. Based on a conversion price of HK$1.60 per share, that means that CIFI will issue approximately 14.9 billion new shares, equivalent to 1.43 times its current share count. The bottom line is that shareholders are likely to face major dilution once convertible bonds are exercised.

CIFI also owes shareholders a loan of about $67.5 million that can be converted into 1.32 billion new company shares at a price of HK$0.40 per share, which could make the dilution even greater.

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