Aoyuan gets relief from debt restructure, as its fate stays tied to property market 

Several courts have approved the struggling developer’s offshore debt restructuring plan, which will save Aoyuan billions of dollars in interest payments

Key Takeaways:

• Aoyuan has restructured its offshore debt with a plan that includes some refinancing, and the issue of common shares and perpetual and convertible bonds.
• Aoyuan expects to save up to $4.9 billion in interest payment on its foreign debt over the next eight years through the plan

By Lau Chi Hang

“Winter will eventually pass, and spring is sure to come.”

That was the message of hope coming from Guo Ziwen, a major shareholder of debt-strapped China Aoyuan Property Group Ltd.(3883.HK), in a letter he sent to employees last year. As things stand now, no one knows exactly when that long-awaited spring will come. But at least the winter is getting just a tiny big less-cold as the company restructures its massive financial obligations.

Burdened with more than 100 billion yuan ($14.1 billion) in offshore debt, Aoyuan filed for bankruptcy protection in a New York court at the end of last year. Its plan to restructure $6.1 billion of that was opposed by one of its creditors, the powerful China Ping An Insurance Overseas (Holdings) Ltd. Despite that, the plan was finally approved by courts in Hong Kong, the Cayman Islands and British Virgin Islands.

Under the restructuring, Aoyuan will refinance its foreign debt by issuing four debt instruments worth a combined $2.3 billion. It will also issue $143 million in zero-coupon convertibles, $1.6 billion in perpetual bonds, and $1.4 billion worth of common shares. The plan will help to reduce interest payments on its foreign debt by as much as $4.9 billion over the next eight years. Under the plan, Aoyuan won’t have any open-market foreign debt coming due in the next two or three years. 

Breathing room

Aoyuan previously got extensions for all of its 12 domestic debt instruments by last September. Now, with the offshore debt successfully restructured, it has become the first property developer in South China’s Guangdong province, home to many of the nation’s top developers, to successfully restructure both its onshore and offshore debt. 

Its well-earned respite comes after two years of intense negotiations. Now, its ability to meet its future obligation will largely depend on how China’s ailing domestic property market fares.

Aoyuan was insolvent with 20.5 billion yuan in net liabilities at the end of last June, according to its results for the first half of last year. It registered a loss of nearly 2.94 billion yuan for the six-month period and borrowed a total of 108.8 billion yuan, including 74.5 billion yuan in short- and long-term bank loans and 34.4 billion yuan via preferred notes and bonds. Over 90% of that debt was set to mature within one year, even as the company had just 6.94 billion yuan in cash and restricted deposits at the time.

It also has 150 billion yuan in investments or assets in the form of properties for sale. But those assets will lose value if home prices continue their declines of the last two years. So, even with its new breathing room, the company will only be able to finally rebound if the property market pulls out of its slump. 

Destocking takes time

The Mainland Chinese property market’s steady supply of new homes contrasts sharply with declining demand, pressuring prices and leaving developers stuck with unsold inventory and short on cash to fund their operations. The slumping demand is reflected in the China Index Academy’s annual list of China’s Top 100 Developers, whose sales fell 17.3% last year to 6.28 trillion yuan. 

The reality is that Chinese see real estate as both an investment product as well as a place to live. When prices are rising, people rush to buy for fear of missing out on quick returns. Some may initially swoop in when the market starts to decline, seeing it as a rare window of opportunity. But people increasingly take to the sidelines as the declines persist, steering clear of the market on belief that the downward spiral will continue. 

The increasing failure by some developers to deliver homes on time is furthering dimming sentiment as potential buyers worry that they won’t even get their homes if they buy now – a relatively big problem in China as developers lack funds to complete some of their projects in progress. Thus, the downward spiral gets worse.

Destocking of excess inventory is also a necessary before a rebound can take place. According to a report from the Shanghai Yiju Institute last year, 68 out of China’s top 100 cities need more than 14 months to absorb existing stock in their local markets, and some smaller cities may require more than four and five years.

An Urban Housing Vacancy analysis published by the Southwestern University of Finance and Economics showed that at the end of 2022, the Mainland already had 120 million vacant homes, nearly double the 65 million vacant units just a year earlier.

Long winter ahead?

Even after inventory is cleared, more time will be needed for a return in consumer confidence necessary to return prices to a growth track. For what may lie ahead we could look to Hong Kong, whose housing market began to decline in 1997 at the start of the Asian financial crisis, and did not finally start to rebound until six years later in 2003.

Then there’s also the broader Chinese economy. The World Bank projects China’s economy will grow just 4.5% in 2024, and many investment banks are also skeptical about the country’s ability to keep growth at or above 5%. Such a slow economy will undoubtedly weigh on demand for homes, further delaying any real estate rebound. 

Aoyuan was founded in 1996. As the Chinese economy took off and the country began hosting international sporting events, the company made a small fortune by building athlete villages for such events and then later transforming them into long-term housing for sale. Its strong attachment to the Olympic Games is reflected in its name, which means Olympic Village.

The company has gone through many ups and downs over the years, always pulling through any hardships to see the kind of spring like the one envisioned by shareholder Guo. But the current winter is quickly shaping up as a test unlike any other for Aoyuan and its peers, with no end in sight. Whether the latest restructuring buys the company enough time to make it to the spring, or it gets gobbled up in a prolonged winter, remains to be seen. In the end, it will largely depend on the domestic property market and whether China’s economy can stabilize.

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