Credit: Visual China

BEIJING, September 21 (AsianFin) -- Reports that Sunac China has applied for "bankruptcy protection" in the United States made it once again the focus of attention on Tuesday after its announcement that its overseas restructuring plan has been approved by its shareholders one day before. Since September, Sunac China has been constantly trending, with news such as hot sales in Beijing projects, returning to the Hong Kong Stock Exchange, and doubling stock prices. Ultimately, it is to ensure the overseas debt restructuring.

If the restructuring is successfully completed, Sunac will become one of the first batch of companies among the top real estate companies to achieve domestic and overseas debt restructuring. The overall debt scale will be greatly reduced, coupled with positive policies, which will help enhance the market's expectations for its business recovery. However, to completely reverse the current predicament and return to normal operations, there is still a long way to go. Whether it can become a lucky survivor among the troubled real estate companies and successfully overcome the crisis remains uncertain.

The road ahead is tortuous. Against the current sluggish market, normal real estate companies are actively exploring new growth point or transforming to achieve growth. Among the many troubled real estate companies, many choose to "lie flat", but there are also a few actively seeking breakthroughs. Although the final outcome is unknown, many troubled real estate companies are also watching how Sunac China can reverse the current situation. Let's follow the timeline after Sunac China's crisis to explore how likely it is for the company to get out of trouble.

High leverage and debts led to Sunac China’s defaults

In May 2022, Sunac China defaulted on its debts, failing to repay the interest on four US dollar bonds totaling $105 million that were due in April. This default also led to the suspension of its stock trading on that day. In fact, before this default, in March 2022, Sunac had already pushed for extensions on two bonds, "20 Sunac 01" and "21 Sunac 03". Its chairman Sun Hongbin even staked his own personal wealth and reputation as an unlimited joint liability guarantee for a RMB 4 billion bond.

In 2015, Sunac's revenue was RMB 23 billion, and it exceeded RMB 100 billion in just three years to RMB 124.7 billion in 2018. In 2020, it further soared to RMB 230.6 billion. However, the myth of "the bolder one is, the more successful one will be" will eventually come to an end. The current situation of this once trillion-yuan real estate company facing a debt crisis inevitably gives people the impression that it had a weak foundation but was overly ambitious. The reasons behind this are also worth pondering.

The practice of pursuing scale has made the company overly optimistic and aggressive in its investments. In addition to the well-known acquisition of Wanda's hotels and cultural tourism assets and investments in the struggling LeEco Group, Sunac China has also been very active in land reserves. In 2019, Sunac's land reserves reached 230 million square meters, an increase of 41%. In 2020, it increased by another 10% to a peak of 260 million square meters, surpassing Evergrande and Vanke. In 2021, its land reserves only decreased by 1.6%.

The large amount of land reserves has brought tremendous liquidity pressure to Sunac China. Coupled with the impact of the pandemic and a significant decline in sales that far exceeding expectations, the company has encountered liquidity difficulties. Prior to the default, in order to maintain its credit in the public market, Sunac China raised funds through the sale of Beke shares, rights issue financing, and Sun's personal assets. However, it eventually fell into a debt crisis in May 2022. The development model of high leverage and high debt has been fully demonstrated in Sunac China.

Despite extension of domestic bonds, challenges remain for overseas bonds

Sunac China's debt restructuring has been paid much attention, as it is the key to whether the company can successfully overcome its difficulties. As of June 30, its total borrowing amounted to approximately RMB 312.57 billion, with a capital-to-debt ratio of about 80.5%. Sunac China held cash and cash equivalents of about RMB 7.291 billion, indicating significant pressure to resolve its debts.

On January 4, Sunac China Holdings Limited successfully obtained the approval of bondholders for the overall extension plan of its domestic bonds, totaling 16 billion yuan. This plan involves 10 corporate bonds and supply chain ABS, with a weighted average extension period of 3.51 years. Sunac China becomes another real estate company to complete the restructuring of domestic bonds, following R&F Properties and Logan.

Since December 2022, Sunac has been communicating with investors about the overall extension plan for its domestic bonds, and has now reached an agreement in accordance with the rules of the bondholders' meeting. The approval of the extension plan is expected to alleviate Sunac's liquidity pressure in the next 3 to 4 years, improve its overall financial situation, and create favorable conditions for the company to resume normal operations.

Sunac China is now working hard to facilitate the restructuring of its overseas debt. On the evening of June 13th, Sunac China announced that as of now, the consenting creditors holding approximately 87% of the total outstanding principal of the existing debt have supported the restructuring agreement. Sun, the major creditor of Sunac, has shown great sincerity to the creditors and made adjustments to the restructuring plan: mainly by lowering the conversion price of debt-for-equity swaps and further increasing the upper limit of mandatory convertible bonds.

Although this plan is designed to persuade more creditors to agree and choose "debt-for-equity swaps" to alleviate Sunac's debt pressure, Sun himself is actually a major creditor of Sunac. After this adjustment, Sun will be in the same boat as other creditors. Moreover, the increase in "debt-for-equity swaps" will dilute Sun's shareholding in Sunac China. At the end of 2022, Suns shareholding was 38.75%. If the plan is approved, it will drop to the dangerous edge of 30%, and he may lose his position as the actual controller of Sunac China. As the founder of the company, Sun is willing to compromise for the sake of rescuing the company.

On June 14th, the second day after the plan was announced, Sunac China issued an announcement stating that the Hong Kong High Court has issued an order to dismiss the winding-up petition filed by Chen Huaijun regarding his holding of senior notes (involving a principal amount of USD 22 million and accrued interest) against the company. The winding-up proceedings against the company have been terminated. Chen Huaijun, is the general manager of Anhui Kingdom Real Estate Development Co., Ltd., and filed the winding-up petition against Sunac China in September 2022. The dispute between the two parties is Sunac China's failure to repay the senior notes held by Chen, involving a principal amount of USD 22 million and accrued interest. This also indicates that the temporary effect of this debt extension for self-rescue has been achieved, gaining time and space to repay the debt. However, the debt still needs to be repaid in the end.

On Monday morning, Sunac China held a meeting for the overseas debt restructuring at the International Finance Center in Hong Kong as scheduled and issued an announcement in the evening stating that "the plan has been approved by a high percentage of votes". Among them, the approval rate of the number of creditors is 99.75%, and the approval rate of the total debt is 98.3%, both of which are the highest in the industry in recent years.

The announcement shows that the creditors have shown a high intention to subscribe to the mandatory convertible bonds. Sunac China plans to further increase the maximum limit of the mandatory convertible bonds in the USD debt restructuring from USD 2.2 billion to USD 2.75 billion. The final approval of the plan will be submitted to the High Court for hearing on October 5th. Therefore, through debt-for-equity swap, , , Sunac will reduce the total debt by more than USD 4.5 billion including the mandatory convertible bonds of USD 2.75 billion, plus USD 1 billion convertible bonds, and debts of approximately USD 778 million converted into Sunac Service equity at a price of HKD 13.5.

Based on the current market conditions, Sunac China's increase in the limit of the mandatory convertible bonds is in line with the overall interests of the company and its shareholders. This overseas debt restructuring will significantly reduce the company's overall debt scale, alleviate liquidity pressure, and greatly increase the net asset scale and optimize its capital structure, which is more conducive to the rapid recovery of healthy operations. However, if the final ruling approves the plan, the successful restructuring of hundreds of billions of yuan of domestic and overseas public bonds will only win a momentary buffer time. In the next few years, Sunac  will always be on the road to resolving debt and has not yet reached the stage of being able to fight lightly.

Amidst the turmoil, the headquarters are moved back to Tianjin

On August 5th, Sunac held a general manager's office meeting where President Wang Mengde announced that the group's headquarters would move back to Tianjin. As the debt crisis intensified, Sunac mortgaged the property rights of the 8th to 13th floors, with reduced staff in various departments. "One Central Apartment," as the mission of Sunac's headquarters, has officially entered a countdown.Most of the employees of the Beijing headquarters will move to the Tianjin headquarters, with only a few departments such as the Brand Department and the Financing Department remaining in Beijing, but they will move to the Raycom Wangjing office.

On September 18, 2016, Sunac acquired 41 companies under Lenovo's Raycom for CNY 13.8 billion. Three days later, they invested CNY 4 billion in Jinke. In early 2017, they provided CNY 15 billion in assistance to LeEco. A few months later, Sun completed the merger with Wanda with 43.8 billion yuan. All of these were completed in Tianjin, which carries the rise and fall of his life. In fact, for Sunac, Tianjin is not only a base, but also a blessed land. Previously, Sunco, under the leadership of Sun, faced the risk of a broken capital chain, but he also created the legend of Sunac in the future.

Now that as the Monkey King has returned to the mountain, the starting point, gathering strength at the base camp, it is a relatively rational choice to strengthen product innovation, and gradually explore new models.

Interim business performance has improved, and the tone of the financial report has significantly improved

According to the interim report released on the evening of August 30, Sunac China achieved contract sales of 52.14 billion yuan in the first half of this year, with a sales collection rate of over 90%. It  realized operating income of 58.47 billion yuan, a year-on-year increase of 20.5%. The company's attributable net loss to owners was about 15.37 billion yuan, a decrease of about 3.39 billion yuan or 18.1% compared to the same period last year; the core net loss was about 9.14 billion yuan, a decrease of 1.92 billion yuan compared to the same period last year. Since the beginning of this year, Sunac China's business performance has improved, with increased profitability. The auditor, BDO Limited, gave an "unmodified opinion" on Sunac's 2023 interim report, which is a significant improvement compared to the "disclaimer of opinion" in the 2022 annual report. This proves that Sunac's fundamentals and operations are stabilizing and improving, and the company's internal management is standardized and has withstood rigorous audit tests.

On September 4th, Sunac China's One Central Apartment in the Chaoyang Park area of Beijing's Dongsihuan sold 169 units in a single day, with a total subscription amount of about 5.62 billion yuan, exceeding the total contract sales for the entire month of July. However, these series of moves have indeed boosted Sunac's stock price.

But it should be noted that on November 28th last year, there was a change in the investor information of China Oceanwide Holdings Group Co., Ltd. In addition to Sunac China, two new shareholders were added: CITIC Trust Co., Ltd. and Wuhu Huarong Capital Chuangyu Investment Center (Limited Partnership). After the change, Sunac China's shareholding ratio in China Oceanwide Holdings decreased from 100% to 10.322%, and CITIC Trust and Huarong's shareholding ratios were 64.678% and 25% respectively. In other words, Sunac's stake in this project has become very small, so the actual profit obtained is only a small fraction of its huge debt.

Moreover, relying solely on the hot sale of a property in Beijing is definitely not enough. The question is whether the entire market recovery can drive the smooth launch of new projects? Can inventory be sold smoothly? Can the value of land reserves worth over 100 million yuan be realized? Only by returning to the sales revenue of tens of billions can the profit cover its debt.

Returning to the Hong Kong Stock Connect, Sunac gains liquidity from southbound funds

According to the Shanghai Stock Exchange on September 5th, the list of stocks eligible for the Shanghai-Hong Kong Stock Connect has been adjusted in accordance with the relevant provisions of the Implementation Measures for the Shanghai Stock Exchange-Hong Kong Stock Connect. The adjustment will take effect from September 5th, 2023, with 22 stocks including Sunac China Holdings being added to the list. Sunac China Holdings has also become the only real estate stock to be added. This means that mainland funds can now directly buy Sunac China Holdings shares (previously they could only sell or hold, not buy).

Being on the list of stocks eligible for the Hong Kong Stock Connect allows for the inflow of southbound funds, attracting more investor attention and increasing the trading activity and liquidity of the stock. At the same time, itusually brings a certain degree of valuation uplift to the company.

On the same day, the share price of Sunac China Holdings soared again, rising by 23% in the morning session and closing with a gain of 25.4% at HKD 1.58. With the closing on September 6th, Sunac China Holdings' share price skyrocketed again, reaching HKD 2.66 per share, a gain of 68.35%. It has achieved gains for three consecutive trading days, with a cumulative increase of over 160%. This arises online joke that Sunac, who just returned from the "immortal realm" to the "human realm," has seen its share price rise to the sky, truly making the company popular once again.

 Following Evergrande, Sunac has filed for bankruptcy protection in the United States

On Tuesday, shortly after the overseas debt restructuring plan was approved by a high vote, Sunac China Holdings reportedly filed for bankruptcy protection in accordance with Chapter 15 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York, in order to obtain recognition by the U.S. court for the restructuring arrangements related to Sunac in the Hong Kong court. What kind of move is this?

The application for "bankruptcy protection" is not the same as the ordinary "bankruptcy" that people are familiar with. It is beneficial for the company and creditors to reach a restructuring agreement to avoid bankruptcy and preserve assets in the United States. Moreover, during the "bankruptcy protection" period, creditors cannot force debt repayment, which is also important.

However, in August that just passed, Evergrande did the same thing in the same court. Some experts believe that when a troubled real estate company applies for overseas bankruptcy protection, it has at least two intentions: First, by restructuring the debts of the troubled real estate company, the overseas assets can be protected, and the litigation and other procedures related to the liabilities can be suspended. Second, after applying for bankruptcy protection, while safeguarding the interests of American creditors, the assets of the troubled real estate company in the United States can still be realized and distributed to representatives or investors of other countries.

The move of Sunac, in the views of the outsiders, is different from the purpose of Evergrande. Sun, in the sake of  self-protection, wants to protect his own overseas assets or funds. Sunac may be avoiding dragging down debt restructuring with overseas assets, and thus setting up a firewall to effectively promote the implementation of debt restructuring plans, using bankruptcy protection to avoid the situation where some creditors may go back on their word later. After all, the recent performance of Sunac China is also changing towards the positive.

For real estate companies, the core of returning to normal operations is to restore sales, restart land acquisition, and obtain public market financing. Currently, Sunac clearly does not have these conditions.

However, in terms of land reserves, according to the interim report, as of June 30, 2023, Sunac China's equity land reserves were approximately 122 million square meters, with an equity land reserve value of approximately 1.39 trillion yuan, with more than 70% distributed in first-tier and second-tier cities. In the first half of the year, 77% of Sunac's sales came from first-tier and second-tier cities such as Beijing, Shanghai, Guangzhou, and Suzhou. This will provide strong support for its sales recovery after the market improves. Currently, the priority for Sunac is to complete the sales of existing projects and revitalize existing assets to give them internal driving force.

Sunac does not need to have too high expectations on  public market financing in the short term. Most private enterprises are still struggling in financing, which further leads to difficulties in debt and operations. Fortunately, Sunac can still obtain certain financial support in terms of guaranteed delivery. Due to the unresolved debt pressure, although it has obtained temporary relief, Sunac's cash flow is still decreasing, and it will still face liquidity pressure in the future. During the period of reshaping the competitive landscape of real estate, various sources of funds are betting on the investment value of real estate stocks. However, it should be understood that the excitement in the fast-changing capital market is short-lived. Whether Sunac can recover still depends on its own transformation and the drive from the market side.

The previous strategy of Sunac was "strong investment + strong products + strong marketing", but reality has proven that this strategy is not sustainable with limited applicability and high risks. In the current market context with supply and demand transformation, although there is strong support from favorable new policies, real estate developers should first consider reshaping their business. Looking at high-quality real estate developers such as China Overseas and Longfor, the future survival and development of real estate developers will require the three elements of security, product strength, and operational capability.

For Sun, his life has experienced many ups and downs, from joining Lenovo after graduation, to founding Sunco, the largest real estate agency in Tianjin, and then breaking through 100 billion yuan in sales for Sunac. Once full of confidence, now his hair has turned white, which is sigh-inducing. For Sunac, completing the restructuring of domestic and foreign debts is just a small step. Although it has gained time and space to repay the debts, as the saying goes, debts must eventually be repaid, and the road to debt repayment is indeed long and arduous. Fortunately, Sunac has never chosen to "lie flat" but actively seeks self-rescue, which is worthy of recognition. It is also Sun's decisiveness and courage that have helped him gain some support.

The recovery of the industry is still full of uncertainties, and whether it can overcome this difficulty still needs time to verify. Sunac has won the opportunity to survive on its own, but with a huge amount of debt and the burden of moving forward, it is not easy for Sunac to live up to its past.

(This article was written by Zhao Hanchen. )