Real Estate Apocalypse|Debt restructuring under Aoyuan's negative assets

21st Century Business Herald reporter Wu Shuying reported from Guangzhou

In early July 2023, after several delays, Aoyuan announced three financial reports in one go, as well as the latest progress of overseas restructuring.

In line with the principle of first reporting good news and then reporting bad news, Aoyuan first disclosed the "major benefits" of its current debt restructuring, which is a debt restructuring plan. At the same time, Aoyuan also announced that it had reached an agreement with 33% of creditors, which means that Aoyuan's foreign debt restructuring has achieved certain results.

Subsequently, Aoyuan submitted three more lackluster financial reports, and the decline in performance and the rise in debt were expected events; Unexpectedly, Aoyuan, an enterprise that is considered to have old assets in the core location, handed over a statement with negative net assets after some tossing.

The two sides intersect, and the current situation of Aoyuan is needless to say; The creditors agree to the choice of the reorganization plan, which is a bit helpless and a little hopeful, and there is no need to read too much. From Aoyuan's financial reports in the past two years, the decline of this real estate company shows that even if it successfully completes the debt restructuring, it is inconclusive on how it will ensure continuous operation and pay off its debts.

The past, present and future of Aoyuan are the adverse journeys experienced by the insured real estate enterprises under the current round of real estate cycle, and they are bound to embark on a thorny road. Looking back at the real estate companies that have successfully completed debt restructuring, even if they temporarily relieve the debt pressure, they have to show up again under the current market conditions. No one dares to slack off in the slightest.

Borrow for another eight years

The launch of Aoyuan's plan is similar to its previous estimate.

In May this year, when Aoyuan announced the progress of "debt repayment", it said that it planned to complete the overall debt restructuring agreement by June 30, and release financial reports as soon as possible in accordance with the resumption guidelines of the Hong Kong Stock Exchange to open the application for resumption of trading.

With just over a month to go, Aoyuan was unable to meet the expected goal of completing the overall debt restructuring agreement, but the restructuring plan was still given on schedule.

On July 2, Aoyuan announced that it had reached an agreement with a group of creditors composed of several overseas senior note holders on June 30, 2023 on the main terms of its comprehensive restructuring plan for overseas debt, and has now obtained the consent of 33% of creditors, and the final approval of this plan is marked by the approval of 75% of creditors.

33% consent rate, barely. Before Aoyuan, a debt restructuring plan disclosed by a large real estate company with high debt could also reach the 35% range, but progress was slow after that.

An investor in foreign bonds told the 21st Century Business Herald reporter that the debt restructuring plan can be agreed, not necessarily because the plan is good enough, but whether there is a way. Some housing companies are okay through assets, the plan is also good, some are definitely not able to get back, there is no other way but to agree.

The overseas debt plan launched by Aoyuan logically reduces the proportion of short-term debt and releases certain assets through bond rollover and debt-to-equity swaps.

Under the restructuring plan, China Aoyuan will issue new financing instruments to replace the original bonds, including four new debt instruments totaling US$2.3 billion with maturity through 2031, 1.4 billion ordinary shares, US$143 million interest-free mandatory convertible bonds and US$1.6 billion perpetual bonds.

Among them, Add Hero Holdings Limited, a wholly-owned direct subsidiary of China Aoyuan, intends to issue three new debt instruments totaling US$1.8 billion, with principal repayment and maturity dates from September 2026 to September 2031, and the cash interest rate on the notes will be 7.5%-8.8% per annum. China Aoyuan intends to issue US$500 million of new debt instruments with a maturity date of September 2031 and an interest rate of 5.5% per annum on the in-kind payment of the notes.

At the same time, China Aoyuan intends to issue 1 billion new ordinary shares, together with 400 million ordinary shares held by the interests of the current actual controller of the Company, Guo Ziwen and his family, which will be transferred to certain eligible creditors in accordance with the terms of the restructuring plan.

This means that the extension period of Aoyuan will be at least 8 years later, and Aoyuan has not added credit enhancement measures to this debt restructuring plan, nor has it converted debt-to-equity swaps with its assets that may have some operating value, which has added some uncertainty to the implementation of Aoyuan's debt restructuring plan in the future.

Insolvent

If Aoyuan's debt restructuring is successful, the source of sustainable debt repayment in the future will still come from the sustainable operation of the company, but Aoyuan's financial report needs to be strengthened in this regard.

The day after the progress of the debt restructuring was disclosed, Aoyuan released three financial reports, which are information that allows the outside world to see its operating conditions more clearly.

In terms of operation, Aoyuan has recorded huge losses for two consecutive years, and its turnover is declining.

In 2021, Aoyuan recorded a turnover of about RMB50,022 million, a decrease of about RMB17,772 million or 26.2% compared with 2020. In 2022, the total turnover will be about 18.711 billion yuan, a decrease of about 31.311 billion yuan or 62.6% compared with 2021.

In terms of profit, Aoyuan's net loss attributable to owners in 2021 was about 33.075 billion yuan, and in 2022, Aoyuan's net loss was about 7.843 billion yuan, adding up to the two years, Aoyuan's net loss attributable to owners was 40.918 billion yuan.

The business situation has not improved, and another set of data worth noting is that it is currently insolvent. According to the annual report, as of the end of 2022, Aoyuan's total equity was negative 17.637 billion yuan, while in the current period, Aoyuan's total overseas interest-bearing liabilities were 42.818 billion yuan, and the total domestic interest-bearing liabilities were 66.232 billion yuan.

This report is inevitably "non-standard". ShineWing Hong Kong's auditor, chose not to express an opinion on the grounds that Aoyuan's various uncertainties relating to going concern may interact with each other and may have an aggregate impact on the consolidated financial statements, so ShineWing is unable to express an opinion on the financial statements.

After the release of the earnings report, investors in Aoyuan could not help but worry that under the impact of negative assets and hundreds of billions of liabilities, even if Aoyuan resumed trading, it would only have symbolic significance. And even if the debt restructuring is successful, it will be difficult to say how it will develop in the coming days.

At present, the first priority of Aoyuan is to "ensure the handover of buildings".

Guo Ziwen, chairman of the board of directors of Aoyuan, said in the annual report, "In 2023, the Group will continue to practice hard work, open source and reduce expenditure, ensure the development and construction of projects and smooth delivery, accelerate sales collection, and strive to reach a settlement with domestic and foreign creditors as soon as possible in a frank and responsible manner." ”

Resumption of trading has not yet expired

One of the goals of Aoyuan's earnings report and debt restructuring is to promote the resumption of trading on the Hong Kong Stock Exchange.

According to Aoyuan, it is currently promoting the resumption of trading in an orderly manner in accordance with the guidelines for the resumption of trading of the Hong Kong Stock Exchange, and all the work is progressing smoothly, and it is confident that it will realize the resumption of trading as soon as possible, complete the mission of confirming payment and guaranteeing the delivery of buildings, and lead the company to return to normal operation. At present, China Aoyuan is accelerating the double hundred action of ensuring the resumption of work and ensuring the delivery of buildings, and its projects are in progress according to plan and progress.

It has been more than 15 months since Aoyuan was suspended, and in another three months, if the conditions for resumption of trading are not met, Aoyuan may be delisted by the Hong Kong Stock Exchange.

According to the guidelines issued by the Hong Kong Stock Exchange on the resumption of trading of Aoyuan on 30 June last year, the conditions for the resumption of trading of Aoyuan include the publication of all outstanding financial results and the handling of any review modifications; Demonstrate the integrity of management and will not pose risks to investors and damage market confidence; In addition, all important information is announced to the market for shareholders and investors to assess the relevant situation.

Aoyuan has now completed an important step in this way, which is to publish its financial results, but since its auditors do not express an opinion, according to the resumption guidelines, Aoyuan may also have to deal with the opinions of auditors to prove its ability to operate sustainably.

Despite the confidence of resuming trading, Aoyuan's current operations are still weak.

According to relevant people in Aoyuan, it frankly admitted that the current real estate sales market continues to decline, and consumers' confidence in buying houses is seriously insufficient. In order to ensure the payment and delivery of the building, as well as to cope with the possibility of more severe tests in the future industry situation, the company has just carried out a new round of organizational structure adjustment, striving to adhere to the longest development time with the minimum resource consumption, maximize the integration of all resources of Aoyuan, carefully calculate every second, and insist on making a difference in the stage of market recovery.

According to Aoyuan's previous announcement, in the first half of this year, its unaudited property contract sales accumulated only about 7.48 billion yuan.

Judging from the prediction of the market by all parties, the current real estate market is still at a low level. Previously, at the Vanke shareholders' meeting, Yu Liang, chairman of the board of directors of Vanke, said that the short-term performance of the market is indeed under pressure, reasonable demand has not been effectively released, the transaction has not reached a reasonable level, and short-term confidence needs to be further rebuilt.

According to the data shared by Yu Liang, in April this year, the transaction of new houses in major cities across the country fell by 26% month-on-month, and in May it fell by 2%, and June has not recovered so far. From the perspective of new home visits and second-hand house viewings, June continued to decline compared with May, down 7% and 10% respectively.

With the pressure of the market, the process of Aoyuan's rebirth is full of thorns. Honest action, not pretense, is needed, and everyone can see it.

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