On December 11, 2023, Sunac China Holdings, one of the prominent real estate developers in China, witnessed a remarkable fluctuation in its stock price, peaking at an increase of 5.36% before settling at around 2.69 RMB per share — an overall rise of 3.07%. This movement took place in the context of a significant announcement made on December 10, when the company disclosed that two of its bonds, the H6 Rongdi 01 and H0 Rongchuang 03, successfully passed the restructuring voteMeanwhile, the fate of eight other bonds remains in the balance as stakeholders await the outcomes of the ongoing voting, set to conclude on December 23, which will collectively determine the future of ten different bonds during this round of restructuring.

Recently, Sunac laid out a second restructuring plan for its domestic debts, offering various options for creditors that include cash buyouts, conversion of debts to equity or equity-like benefits, debt collateralization, and extending the repayment timeline

Notably, the proposed debt reduction is expected to exceed 50%, a fact that has drawn considerable attention from financial markets and analysts alike.

As one of the first large real estate companies to accomplish both domestic and international debt restructuring, the question arises: why is Sunac engaging in negotiations for the second round? The rationale behind this lies in the evolving landscape of the real estate industry, along with the inherent challenges faced by developers during the changing economic climate.

During the initial restructuring phase, like many of its peers, Sunac opted for a promise-based extension model for its domestic debtsBy the end of 2022, they had completed a large-scale reorganization pertaining to 60 billion RMB of bonds, managing to extend repayments by an average of 3.51 years

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Subsequently, 631 million RMB was successfully repaid in 2023 under the new arrangements.

The first round of this restructuring proceeded smoothly, partly owing to the fact that interest rates on domestic debts had remained stable, with only the repayment schedules being adjustedTo bolster creditor confidence, Sunac's Chairman, Sun Hongbin, personally guaranteed one of the bonds, which proved instrumental in facilitating a smoother negotiation process during their initial talks.

Additionally, Sunac offered various assets as part of its collateral during these negotiationsThese included strategic properties across major cities such as Chongqing, Wuxi, Chengdu, Guangzhou, and Jinan, alongside rights to revenue from several high-potential real estate projects in Shaoxing and Chongqing.

However, as the years 2023 and 2024 unfolded, the overarching real estate market continued to face significant adjustments, with no clear signs of a turnaround in the industry's fundamentals

This prevailing sentiment left many development firms, including those who had restructured their debts, grappling with the challenges of repaying obligationsSeveral were still caught in the precarious situation of failing to meet their obligations, and finding it hard to implement agreed-upon plans.

According to insights from industry researchers, many firms spent previous years focusing on resolving their overseas debt issues, but equally daunting pressures regarding their domestic debts remainedFor many developers, after the necessary extensions were secured, the principal amounts remained unchanged, while the pressures from increasing interest rates could not be overlooked.

Since the start of this year, several real estate companies, including Sunac, have deferred the repayment of principal and interest on domestic bonds, illuminating a landscape filled with mutual challenges

In light of these complexities, the pressing question is how to find solutions that would not only permit businesses to "trade time for space," but also foster a conducive environment for operations without compromising the interests of creditors.

Sunac has presented an alternative model for restructuring its domestic debt, aggregating to 15.4 billion RMBThe proposal includes four potential avenues: debt reduction, equity conversion, repayment extensions, and interest rate reductions — targeting a debt reduction exceeding that 50% threshold if implemented correctly.

A debt restructuring expert remarked that the industry has previously navigated various strategies for alleviating debt, including extensions, restructurings, and bankruptcy proceedingsThis negotiation by Sunac aims to introduce a systematic and long-term market-oriented solution, echoing strategies employed during their overseas debt restructuring, while also furnishing creditors with flexible options that encompass cash, equity, and asset value.

Critically, the proposed package offers creditors a choice without imposing mandatory terms, allowing them to select what aligns best with their financial requirements

Notably, the option for deferring debt repayment bears no cap on financial amounts, enhancing its attractiveness.

Moreover, most of the cash obtained from rights offerings is slated for discounted buybacks of debts, and additional arrangements for cash payments imply that by the end of next year, principals may receive 1% of their dues, alongside some accrued interestInterestingly, the option for converting debts into financial rights has gained traction, especially as Sunac's stock price has surged more than 90% since the beginning of the year.

To date, the restructuring votes on the H6 Rongdi 01 and H0 Rongchuang 03 bonds have successfully passed, indicating a degree of feasibility in the proposed restructuring approachHowever, the remaining eight bonds await the outcome of the voting process, which is proving to be more complex than previous rounds, given the multitude and complexity of Sunac's domestic creditors.

According to Liu Shui, the head of enterprise research at the China Index Institute, one of the key points of Sunac's restructuring proposal is its provision of a variety of options for debtors

These include cash buyouts, stock-based earnings rights, and asset collateralization, enabling creditors to select based on their own financial conditions.

From Liu's perspective, Sunac benefits from holding a portfolio of high-quality assets primarily located in core urban areas that exhibit resilience, coupled with proactive self-rescue effortsThis sentiment is reinforced by the recent performance of its flagship project, Bund One, which has experienced three consecutive sellouts, with total sales hitting 21.5 billion RMB — a testament to the company’s market acceptance and operational capacity.

In the broader context, the current state of the real estate market seems to have stabilized, which bodes well for companies focusing on debt restructuringLiu argues that stability in the real estate sector benefits at-risk companies by facilitating sales, recovering capital, and improving the financing climate, thereby enhancing the willingness of financial institutions to engage in investments