JP Morgan's Three Rescues for Country Garden

Author | Zhou Zhiyu

Two years later, Morgan Stanley once again played an important role in the self-rescue journey of Evergrande.

On April 15th, Evergrande announced that it had signed a final agreement with the buyer London One Limited controlled by Zhang Songqiao. The buyer will purchase the equity of the project company of London Nine Elm (referred to as the "London Project") from Evergrande at a symbolic price of 1 Hong Kong dollar, and will purchase shareholder loans with at least 800 million US dollars (approximately 6.247 billion Hong Kong dollars) of Evergrande US dollar bonds. At the same time, the buyer will take over the loans on the project. The transaction is expected to be completed by May 15th.

Morgan Stanley is the exclusive solicitation agent for this transaction.

Including the extension of Evergrande's 33.3 billion bonds two years ago, this is Morgan Stanley's third time to help Evergrande out of trouble. In just two months, involving over a hundred investors, Morgan Stanley handled this exceptionally complex transaction, setting a new record.

This transaction will be a highlight in the debt crisis of Chinese real estate companies. It is currently the largest solicitation project in Asia except for Japan, and the first transaction in the Chinese real estate sector involving solicitation, third-party exchange offers, and asset disposal.

It provides a new approach for real estate companies to resolve debt risks and emerge from current difficulties. Maximizing the value of core projects and reducing corporate and group-level debt burdens has become a key issue for real estate companies as they enter the second half, addressing debt maturity and cash flow shortages.

The industry-wide deep adjustments over the past three years have been a challenge for every player in the industry. Through life and death experiences, Zhang Li, Li Silian, and many other big players have seen their fates diverge.

Win-Win

Morgan Stanley's intervention was due to troubles encountered by Evergrande's London Project.

According to the current sales progress of the London Project, it is unlikely to reach the sales milestone of 240 million pounds stipulated in the loan terms by May 13th this year. The project would default on the loan, leading to a takeover by the lender.

This would trigger a chain reaction, resulting not only in high default interest payments but also in the cross-default of Evergrande's successfully restructured US dollar bonds. This outcome is not favorable for any party involved.

The London Project played an important role in Evergrande's 33.3 billion foreign debt restructuring two years ago, convincing investors and serving as core assets for credit enhancement.

At that time, Evergrande promised that after repaying project-level loans and other expenses, the remaining equity (cash flow after repaying project loans) of the London Project would be used to prioritize the repayment or repurchase of US dollar bonds. Now, with the sales of the London Project falling short of expectations, troubles have followed.

Xi Fangshuo, head of Morgan Stanley's China Real Estate Investment Banking Department, told Wall Street News that the best solution to avoid project loan defaults is to sell the London Project and use the remaining equity on the project to help Evergrande reduce its debt.

To unravel this "chain link," consent from overseas US dollar bondholders is required (i.e., "solicitation"), to revise previous terms, remove restrictive contracts and commitments related to the sale of the London Project. At the same time, Zhang Songqiao has initiated an exchange offer for the SPV established for the acquisition, inviting creditors to exchange their original Evergrande US dollar bonds for perpetual bonds issued by the aforementioned SPV Agreement solicitation is a controversial point among investors, with many investors objecting to the amended terms, believing that Evergrande is facing a "second default".

Initially, the Morgan Stanley team also encountered resistance from many investors when engaging with them. Investors were not clear about the status of the London project at the time, and their initial reaction was that the pledged assets given to them in the past were being stripped away.

After communication between the Morgan Stanley team and over a hundred investors, investors also realized the issue with project loans. If the project loan defaults and is taken over by the lender, the remaining value left for bondholders after the London project is taken over or auctioned is very limited; having a buyer like Zhang Songqiao take over the London project can maximize the project's value.

Xi Fangshuo pointed out that selling the project, repaying project loans, and using the remaining equity of the project to help Evergrande reduce its debt is also a good outcome for Evergrande.

Therefore, through this transaction, Evergrande can repay around GBP 800 million in project loans and achieve at least USD 10.5 billion in debt reduction; for USD bondholders, they can choose to swap their Evergrande Group-level USD bonds to the project, directly sharing the benefits of the project's value release; creditors who continue to hold Evergrande Group USD bonds will also benefit from the overall decrease in Evergrande's debt level and improvement in its financial situation.

"This is a win-win result," Xi Fangshuo believes that Morgan Stanley is helping real estate companies overcome difficulties and also helping investors realize better value. "Preserving the project value is beneficial to everyone, and investors do not want the core project to be taken over and liquidated."

Way out

With the support of Morgan Stanley and Zhang Songqiao, Evergrande once again narrowly passed a hurdle.

As one of the earliest major real estate companies to face difficulties, Evergrande's series of operations after the crisis have provided inspiration to the industry and become a model for many subsequent real estate companies to learn from. Actively selling assets, using their high-quality assets as credit enhancement measures to gain investor trust, and so on; the specific operations in the extension plan have also become a reference for some troubled real estate companies.

However, the market environment two years ago is vastly different from the current one.

Challenges brought by the imbalance of revenue and expenses in development operations, financing shifting from total-to-total to project-based, and other issues are plaguing real estate companies, requiring even "top students" like Vanke to properly address the cyclical challenges during industry transformation.

Real estate companies need more time and more specific, targeted solutions to maximize the value of their assets, restore liquidity, and lay the foundation for overcoming their difficulties.

The difficulty for real estate companies to complete overall debt restructuring is also increasing. Over the past two years, holders of real estate companies' USD bonds have become more diversified and varied, with different demands and restrictions on restructuring; from initial due diligence to plan negotiations, creditor voting, and court proceedings, it takes at least a year or more, consuming time and effort; apart from companies like Sunac, Agile, and Zhongliang, few real estate companies have completed overall debt restructuring.

This also means that when considering reducing real estate companies' debt burden, while addressing real estate companies' debt issues in terms of scale, term, and cost, it is also necessary to consider how to maximize the value of the core projects held by real estate companies and preserve the value of the projects Firms like Sunac have cooperated with institutions such as China Huarong and Oriental Asset to revitalize core projects like Dongjiadu in Shanghai and Taohuayuan in Wuhan, leveraging the entire Sunac Group. Similarly, this time, Agile Property Group is starting from the project level, converting the company's debt into project-level equity, quasi-equity, or perpetual bonds, thereby assisting real estate enterprises in overall debt restructuring and debt reduction.

Xi Fangshuo believes that as more and more real estate enterprises advance comprehensive restructuring, it is crucial to help USD bond investors preserve the value of their bonds, assist real estate enterprises and investors in self-rescue, and avoid causing further value loss. This transaction by Agile Property Group brings a fresh perspective.

Of course, each real estate enterprise has its own uniqueness, with strengths in assets, capital operations, and operational capabilities. This diversity means that they all need targeted solutions to bring out the maximum value of their assets on the path out of the crisis.

Agile Property Group's management of the USD 5.7 billion overseas debt is only a small part of the overall debt restructuring of distressed real estate enterprises. However, to guide the industry back to healthy development, efforts from various parties are needed to build on this "small part" and accumulate incremental progress.

Today, real estate enterprises are gradually clearing what needs to be cleared and restructuring what needs to be restructured. Players like Sunac and Agile Property Group are still facing numerous challenges on the road to debt restructuring, striving to survive. Institutional expectations for the real estate industry are also shifting towards optimism as market risks gradually clear out.

The trillion-dollar real estate industry is not pessimistic. New players are entering the market eagerly, while old players are changing their strategies to stay in the game. The legends of the first-generation real estate tycoons are gradually becoming history, as a brand new era has arrived