E-House reorganization continues

The real estate services provider wants to raise money through a new share sale as part of a complex plan to restructure its defaulted bonds

Key Takeaways:

  • E-House is working on a plan to raise HK$483 million by selling new shares through a rights offer
  • The funds raised would be part of a scheme to give cash and equity in the company’s key businesses to holders of its defaulted bonds


By Warren Yang

Nothing seems to come easy for E-House (China) Enterprise Holdings Ltd. (2048.HK) these days, as the distressed real estate services provider races to restore order to its shaky house. That should come as no surprise to anyone, especially in the current environment where much larger developers are defaulting on billions of dollars in debt as China’s property market goes through a painful correction after years of breakneck growth.

E-House, which counts e-commerce giant Alibaba (BABA.US; 9988.HK) as a major shareholder, is fighting for its own survival after defaulting on two dollar-denominated bonds worth about $600 million in April last year and June this year. Because E-House counts real estate developers as some of its primary customers, distress among that group translates to reduced demand for its products. That’s curtailing E-House’s ability to generate cash as pressure grows for it to repay its debt.

E-House has tried to resolve its debt situation, but without success. Its latest attempt involves a complex debt-for-equity swap, with the issuance of new shares as a first step. In its latest monthly update on the plan filed at the end of last month, E-House appeared on track to submit a detailed filing on the equity offering proposal by the end of this month. It’s looking to raise HK$483 million ($62 million) in gross proceeds from the transaction.

But the company has already missed one deadline, after originally planning to hand in the document by the end of August. It ended up extending that by three months just a couple weeks before the deadline, citing “complexity” of the required information. It its latest status report, E-House said it’s in the process of addressing comments on its draft announcement from the Hong Kong bourse and the city’s securities regulator.

Without a full picture of what’s happening behind the scenes — and given the company’s record of previous delays — additional delays wouldn’t come as a huge surprise.

The company’s earliest repayment plan was hatched before E-House’s first default last year. Flagging the possibility of such an event, the company sought to get holders of the at-risk bonds to exchange them for new ones with amended terms. That failed, leading E-House to work out that plan through a Cayman Island court. While trying to convince affected bondholders, the company filed for protection under Chapter 15 of the U.S. bankruptcy code in New York to prevent its U.S. assets from being seized by the creditors.

The bondholders ultimately agreed to new terms. But then E-House couldn’t make an upfront payment to them, sending the process back to square one. The company came up with the current restructuring plan earlier this year, covering both of the bond defaults, as well as a convertible bond held by Alibaba.

Debt-for-equity swap

Under the latest repayment plan, E-House will use cash that it raises by selling new shares to pay a small part of what it owes bondholders. “Tiny” may better describe the proportion of the cash repayment, since bondholders would receive just $60 in cash for every $1,000 owed, or just 6 cents on the dollar.

Then, E-House, using of a special purpose vehicle, will convert the remaining debt it owes the bondholders into a majority stake in an entity called TM Home, which controls most of the company’s businesses, including those providing real estate data, consulting and marketing services, as well as its Leju e-commerce platform.

To help the bondholders cash out their shares in TM Home to recoup some of their investment, E-House says it will make “reasonable” efforts to sell their collective stake to another buyer by the end of August next year. More than 80% of the creditors support the new plan, though they don’t really have a lot of other options.

Whether E-House can find another buyer for TM Home later on looks problematic, since an end to China’s real estate downturn is nowhere in sight. In the sector’s latest distress signal, the prices of dollar bonds issued by China Vanke (2202.HK; 000002.SZ), one of China’s largest real estate developers, tumbled late last month as investors worried about its liquidity, prompting its major state-owned shareholder and local government officials to pledge their support.   

Despite its shaky situation, E-House’s finances appear to be stabilizing after a rocky 2022. Its revenue decreased 5.7% year-on-year to 2.3 billion yuan ($316 million) in the first half of this year, easing from a 61% plunge in the same period last year. The company’s loss more than halved in the first half of this year, which is also a positive sign. But any loss is still a loss, and E-House’s limited pool of cash and other assets continues to shrink, pushing its shareholder equity deeper into negative territory.

E-House shares are barely worth anything, hovering well below HK$1. Its price-to-sales (P/S) ratio stands at just 0.07, making it meaningless to compare it to other peers, even though it still has a market value of HK$350 million. It’s also worth noting that many other Chinese real estate-related stocks are now deeply distressed, reflecting the severity of the property slump. For example, shares of small property developer Yuzhou (1628.HK) also trade at a similarly low P/S ratio of 0.03.

There are many things E-House needs to get right to move past the whole bond saga. It will need to tread carefully but also move quickly to resolve its defaults, as any new setbacks in the restructuring process could still prove to be fatal.

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