Greentown launches tender to prevent default

Chinese real estate developer Greentown China Holdings, which is currently trying to buy back a $400 million 9% bond issue, yesterday said that its revenues increased by 15.6% to Rmb6.6 billion ($968 million), while its net profit dropped 41% to Rmb540.3 million.

While this doesn't sound too bad for a company operating in China's troubled property sector, equity investors were unimpressed and pushed the company's share price 6.8% lower on the day. No doubt, the sell-off was partly triggered by the management's projection that "2009 will still be a difficult and uncertain year for Greentown" due to the continued impact of the global economy on China's economic recovery in the short-term and the continuing adjustment of the property market.

However, while equity investors are bracing themselves for the possibility of more bad news, the earnings report may actually help ensure the success of Greentown's ongoing bond tender as it gives investors yet another reason for why they should accept it and avoid risking a further deterioration in credit quality should the local property market fail to recover this year.

Greentown's maximum tender payment of 85 cents on the dollar is the most generous among the Asian bond tenders in the past six months, and observers say it signals that the company is trying to do right by its international bondholders. In a note issued yesterday, Calyon said it expects the high-yield tender offer to be successful since it offers an "attractive exit".

Shortly before the launch of the tender on April 21, bids for the Greentown bonds had moved from the mid 50s to the mid 60s, but as recently as mid-March they were still trading below 40 cents to the dollar. And since the bonds don't mature until 2013 it is questionable if - given the volatility in the secondary markets these days - it is worth holding out for four more years just to get another 15 cents on the dollar.

The offer, which is being arranged by Deutsche Bank, has been triggered by the fact that the company is in breach of a number of covenants on its high-yield bond and consequently the offer is coupled with a consent solicitation to substantially change or eliminate all the restrictive covenants and certain events of default.

If successful, the proposed amendments will increase the company's financial and operational flexibility. If not, there is a risk that some of the existing bondholders may choose to trigger an accelerated re-payment of the debt -- something which the company would have difficulty handling given its current financial position, especially since a default on its high-yield bond could have a domino effect and result in a breach of covenants on its outstanding convertible bonds and bilateral loans in China.

The consent solicitation needs the approval of bondholders representing at least 50% of the outstanding principal amount and the tender is subject to the acceptance of the consent solicitation. Investors who tender their bonds (which means they will automatically be viewed as also having accepted the proposed changes to the bond indenture) before the early tender deadline on May 4 will receive a total payment of 85 cents per dollar of principal, including a base purchase price of 77.5 cents, an early tender payment of 5.9 cents and a consent payment of 1.6 cents. Investors who tender after May 4, but before the offer closes on May 19, will be entitled to 77.5 cents only.

Another incentive for the bondholders, argues a source, is that if they don't tender they will run the risk of holding bonds that have been stripped of all their protective covenants and probably will be very illiquid. 

As part of its quest for more capital, Greentown two weeks ago announced the sale of part of its stakes in two separate real estate project companies for Rmb295.9 million ($43 million) to a trust controlled by a third party, namely Industrial and Commercial Bank of China. Greentown will subscribe to a minority stake in the trust. The company said the transaction will help raise capital to finance the development and construction of the two project companies, while at the same time reducing its own liabilities. Equity investors appeared to agree and sent Greentown's share price almost 24% higher over the next two sessions.

However, the transfer to the assets into the trust and the subscription of units in the trust did result in the company breeching yet a few more covenants attached to its high-yield bond, making the consent solicitation and the default waiver even more urgent.