Court-led restructurings could help rescue distressed Chinese developers. Jinke Property Group Co. Ltd. has turned to the courts for a reorganization (reorg) under China's bankruptcy law. We see the developer's last-ditch effort as a step forward in the country's property crisis. Creditors and shareholders will likely absorb haircuts, allowing the developer to return to normalized operations.
What's happening
The Chinese court agreed on April 22, 2024, to lead a restructuring of Jinke (nonrated). The court is overseeing resolution of the defaulted bonds (offshore and onshore) issued by the company, a mid-tier developer based in Chongqing city. It will be the first onshore court-led reorg of a national-scale developer, which has both domestic and offshore debt. Importantly, the issuer is domestically incorporated.
Why it matters
The reorg is both a lifeline for Jinke and a restructuring template for similarly distressed entities.
A path is opening for Jinke to obtain resolution on its defaulted debts. About one-fifth of issuers among our rated portfolio in 2021--that is, before the China's property downturn began--are incorporated in China. They have issued offshore bonds either directly or through the use of a guarantee.
- Offshore and onshore bond investors will rank equally (pari passu) in their claims in a Jinke-style reorg. However, onshore and offshore bonds are both structurally subordinated to project-level debt.
- This is a different prospect than that faced by investors in offshore bonds of China's offshore-incorporated developers (so-called red chips). Most of the offshore bonds issued by Chinese developers have come via red chips, including Evergrande.
- If the offshore parent is liquidated, the offshore parent--and, therefore, the offshore investors--can only get repaid by extracting residual cash flow from the onshore entities, such as though dividends or by selling equity. This presents substantial legal and execution risk. Moreover, the offshore parent--as a shareholder--will only be paid after the onshore creditors in terms of repayment ranking when liquidating the onshore entities.
- Investors holding debt issued by red chips are thus subordinated in their claims to investors in onshore bonds issued by the onshore entity (see "Evergrande Liquidation To Amplify Subordination Risk On China Property Bonds," Jan. 31, 2024.)
The Jinke workout opens the possibility that the issuer can return to normal operations.
Jinke and many other Chinese developers in its situation have been locked in a loop of repeatedly extended debt maturities. Their negotiations with creditors have generally involved pushing the problem down the road by stretching out repayments, without decisively fixing the core issue: debt reduction.
The court-led process will be more constructive for issuers, in our view. This is because the reorg, if successful, will result in a comprehensive restructuring package. It will cut debt and inject fresh equity. Entities will likely come out of the process with a restored balance sheet, in a position to do business.
What comes next
All eyes will be on the Jinke outcome. The court-led Jinke workout should not take long since the firm has already signed a framework agreement with strategic investors. Offshore investors will be aiming for partial recovery on their investment and will be assessing how fairly they were treated in this process. Issuers--especially domestically incorporated developers--will be assessing how operationally healthy Jinke is at the end of the process.
We believe the outcome will provide insight to offshore investors on the benefits of court-led debt resolutions in China. The event may also reset investors' sense of risk on developers' offshore debt--for better or worse.
Writer: Jasper Moiseiwitsch
Related Research
- Evergrande Liquidation To Amplify Subordination Risk On China Property Bonds. Jan. 30, 2024
- Sunac Blazes Trail For Distressed China Developers Restructuring Offshore Debt, Nov. 28, 2023
- China Property Delistings Narrow Restructuring Options, June 7, 2023
- China Debt Restructurings: Five Cents On The Dollar Or 50?, Feb. 28, 2023
- China's Surging Defaults Test Courts And Bond Recovery, May 5, 2022
This report does not constitute a rating action.
| Primary Credit Analysts: | Esther Liu, Hong Kong + 852 2533 3556; esther.liu@spglobal.com |
| Fan Gao, Hong Kong + (852) 2533-3595; fan.gao@spglobal.com | |
| China Corporates Specialist: | Chang Li, Beijing + 86 10 6569 2705; chang.li@spglobal.com |
| Secondary Contact: | Lawrence Lu, CFA, Hong Kong + 85225333517; lawrence.lu@spglobal.com |
| Research Assistant: | Ivy Yi, Hong Kong |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.