20220722-招银国际-CMBI_Credit_Commentary_CSCHCN__A_more_convincing_restructuring_plan_with_a_clearer_roadmap_4页_460kb

CMBI Credit Commentary Summary

Core Content

This document provides a credit commentary on China South City (CSC) and its restructuring plan, focusing on the potential recovery path and valuation analysis for its USD bonds. It outlines the restructuring efforts, credit enhancement measures, and the current financial situation of CSC, while also addressing the legal and regulatory disclosures related to the report.

Main Points

Restructuring Plan

• Overview: CMBI considers CSC's restructuring plan as one of the most convincing among over 20 similar plans in the Chinese property sector.
• Key Measures:
  • Equity Injection: State-owned enterprise SZCDG has injected equity into CSC.
  • Asset Sales: CSC has sold assets to SZ SOEs.
  • Liquidity Support: SZCDG has acquired 50% of CSC's property management operations, demonstrating commitment to support CSC.
  • Maturity Extension: The restructuring plan extends the maturity of CSC's USD bonds by 20 months, moving them from short-term to long-term debt.
  • Coupon Rate: The coupon rate for all bonds is unified to 9%, lower than the original rates.
  • Consent Solicitation: CSC is seeking consent to extend the maturity of its 5 USD bonds (totaling USD1.6bn) for 20 months. The early consent fee is 1 pt, and the original maturity consent fee is 5 pts.
  • Amortization Schedule: A total of 10-12 pts of amortization will occur within 6 months of the original maturity.
  • Consent Threshold: The threshold for consent is 75% in principal amount for each bond.

Credit Enhancement

• Keepwell Agreement: SZCDG will provide keepwell for the consented bonds.
• Offshore Accounts: CSC will set up offshore accounts for early redemption of the consented bonds when it secures new onshore loans.
• Asset Valuation: Based on asset valuation of cUSD3bn and a LTV of 50%, CSC could obtain USD1.2bn in secured loans, which will be used for USD bond repayment.

Road Map to Recovery

• Secured Loans: Discussions are ongoing for secured loans against specified assets in Hefei and Chongqing, which could significantly speed up redemption.
• Previous Repayment: CSC repaid two USD bonds (totaling USD550mn) in August and September 2022 using onshore secured loans.
• Expected Support: CMBI understands that CSC is under discussions for up to another USD800mn in onshore secured loans with SZCDG's assistance.

Financial Situation

• Cash Burnt: CSC has experienced significant cash outflows to meet debt repayment, interest expenses, and construction capex.
• Funding Efforts: Despite efforts in funding raising, these have been offset by cash burn.
• Operating Performance: In FY22 (ended March 2022), CSC's contract sales fell by 27% to HKD11.8bn, reflecting the adverse impact of the pandemic.

Key Information

• FV Estimates: CMBI's fair value estimates for CSCHCNs (excluding consent fee and interest accrual up to 9 Aug'22) range from 75 to 99. Current valuations are at 41-51, indicating a margin of safety and upside potential.
• Bond Details:
  • CSCHCN 11 1/2 08/12/22: FV estimates range from 98.92 (10% discount) to 82.87 (25% discount).
  • CSCHCN 10 7/8 10/26/22: FV estimates range from 98.80 (10% discount) to 80.97 (25% discount).
  • CSCHCN 7 1/4 11/20/22: FV estimates range from 98.76 (10% discount) to 80.03 (25% discount).
  • CSCHCN 11.95 02/09/23: FV estimates range from 98.11 (10% discount) to 77.56 (25% discount).
  • CSCHCN 10 3/4 04/11/23: FV estimates range from 97.22 (10% discount) to 75.35 (25% discount).

Investment Recommendation

• Buy Recommendation: CMBI recommends buying CSCHCNs due to the actionable restructuring plan and the margin of safety in current valuations.

Legal and Regulatory Disclosures

• Author Certification: The author certifies that the views expressed reflect personal opinions and that there are no conflicts of interest related to the report.
• Important Disclosures:
  • The report is for informational purposes only and not investment advice.
  • There are risks involved in transacting in any securities.
  • The value of investments is uncertain and may fluctuate.
  • The report is not an offer or solicitation to buy or sell any security.
  • CMBIS is not liable for any loss or damage incurred from reliance on the report.
• Disclaimer:
  • The report is intended for specific recipients in the UK, US, and Singapore.
  • It is not available for distribution to others without prior written consent.
  • CMBIS may have business relationships with the companies mentioned, which could affect the objectivity of the report.

Conclusion

CSC's restructuring plan is seen as a positive development, with clear steps and support from SZCDG. The extended maturity and credit enhancement measures are expected to improve CSC's financial position and increase the likelihood of successful refinancing. CMBI's fair value estimates suggest a margin of safety and upside potential, leading to a buy recommendation. However, the report includes important disclosures and disclaimers regarding the risks and limitations of the information provided.