04 Jan Kaisa Group Holdings Ltd (佳兆业集团- HK:1638) Default

Kaisa Group Holdings Ltd., a HK-listed real estate developer with large scale mixed-use real estate developments in over 30 cities in China was the first Asian credit to default in 2015. English language coverage of the story has been provided by Bloomberg, the FTReuters and the South China Morning Post. Chinese language coverage has been provided by Sina and Epoch Times. From the website, Kaisa has commercial real estate assets in the Pearl River Delta, Shanghai Delta, Central China, Southwest and North/Northeast; however, the 2013 annual report states that 30% or more of sales came from Shenzhen assets. According to the Sina account, its Shenzhen government connections  have been an asset and, most recently, a liability.

Here is a summary of events leading to the default:

  • Kaisa came to the attention of analysts on December 3, when the company disclosed it was in talks with the Shenzhen government to lift a ban on property sales blocking the sale of some unsold property units.
  • On December 4, Haitong International Securities put out a sell recommendation on Kaisa.
  • In mid-December members of the founding family trust (Chairman Kwok Ying Shing and his two brothers) sold 11% of the company’s issued stock to Sino Life Insurance Company for HKD 1.7 ($219 MM) to create interim liquidity while the ban was in effect.
  • The December sale of the shares lowered the public float to 20.8%, which is less than the required minimum 25% on the Hong Kong exchange.
  • Meanwhile, the resignation of Chairman Kwok triggered an early payment clause under a HK 400 MM loan by HSBC to the company and causing a default.
  • The CFO, Cheung Hung Kwong and Vice Chairman Tam Lai Ling resigned the next day.

According to Chinese language sources, Kaisa has seven credit facilities valued at $2.48 BN, of which 78.6% are US dollar denominated. Default on the HSBC loan could potentially trigger cross-default clauses on other loans and bonds, including an $800 MM US-denominated bond facility due 2018, which allows accelerated repayment if 25% of the investors vote to accelerate. The original yield on those bonds was 9% but jumped to in excess of 29% on January 2(Epoch Times) and exceeded 45% on January 4 (Sina). Also as of January 4, the yield on another $500 MM US dollar facility due 2020 is about 40%.

In the market for its shares, Kaisa (HK:1680) dropped from a two-year high of HKD 3.2 on 9/24/2014 to a low of HKD 1.59 when trading ended at the end of 2014. Since January 1, trading has been suspended indefinitely since the Group received HSBC’s default notice.