Chaoshan real estate tycoon strives to break through

Author | Zhou Zhiyu

Editor | Zhang Xiaoling

The logic of the real estate industry in resolving debt risks is undergoing profound changes.

If the keyword for the past four years was a passive response characterized by "extension for survival," now, more and more real estate companies are choosing to actively take up the scalpel and engage in a self-rescue akin to a bone-scraping detox.

According to Wall Street News, Longguang Holdings announced a comprehensive optimized domestic bond restructuring plan on June 20. This plan involves 21 corporate bonds and asset-backed securities, with a total principal amount of approximately 22 billion yuan. Compared to the plan initially proposed in March this year, the optimized version demonstrates greater determination across multiple dimensions after soliciting investor opinions.

This is the second attempt by Ji Haipeng, chairman of Longguang Group's board, and his team to restructure domestic debt in the past three years. In 2022, the company promoted an extension that postponed the overall debt by 3 to 4 years. However, the continued market downturn and disappointing sales collections meant that the first effort did not yield a genuine respite.

Similar to other distressed real estate companies in the industry, Longguang's new plan also offers a "package" that includes diversified options. The refinement and innovation in details are considered key to its quest for a breakthrough.

The new plan provides five major options: cash buyback, asset debt settlement, debt-to-equity swap, specific assets, and full debt retention.

In the cash buyback option, the repurchase price has been significantly increased from 15% in the previous plan to 18%. More innovatively, Longguang has added an "asset sale monetization mechanism," promising that if the demand for this option exceeds the initial quota, the company will initiate the sale of designated assets, using the proceeds to continue repurchasing at the 18% price, providing greater possibilities for investors eager to exit quickly.

The exchange ratio for asset debt settlement has also been significantly improved. For example, the "debt settlement with goods" model's exchange value has increased from "100 yuan face value exchanged for 25 yuan value" to "100 yuan face value exchanged for 35 yuan value," with 1 yuan in cash included in the 35 yuan value. Whether directly exchanging for physical assets or choosing trust shares, all models have set up head cash arrangements, which are rare in peer plans, reflecting consideration for investors' immediate cash flow needs.

Regarding the debt-to-equity swap, Longguang plans to issue 530 million shares of stock. To enhance investor confidence, Longguang has also set up a "betting" clause: if the stock price performs poorly two years later, the company will issue an additional 20% of shares to investors who choose this option. Some analysts believe this move is highly innovative and sincere within the industry, reflecting the company's confidence in future stock price recovery.

Specific assets represent a unique option in Longguang's plan. Investors can convert the bond principal 1:1 into a trust share of a specific asset, with no principal reduction. The underlying asset is a large commercial center, "Blue Whale World," located in Shanghai Lingang, covering an area of 144,000 square meters. This project is expected to open this year and is likely to provide investors with a long-term stable operating cash flow as a source of repayment. As a result, Longguang has become the only real estate company in the industry to offer an option in its restructuring plan that provides "no principal reduction and guarantees quality operating physical assets." For investors wishing to retain their claims, Longguang's new plan has also shortened the extension period from 9.5 years to 8 years, making it one of the shortest extension periods among similar industry plans.

To support this plan, Longguang has overcome numerous difficulties, raising 500 million yuan in cash from overseas and securing some stock resources from Longguang Group. Bai Wenxi, chief economist for the China region at the China Enterprise Capital Alliance, believes that Longguang's raising of "real money" from abroad to support domestic restructuring has effectively enhanced its debt repayment capacity and boosted investor confidence.

The introduction of this optimized plan comes after an exceptionally arduous negotiation process. In March of this year, when the preliminary terms of the first version of the plan were leaked, it faced public opposition from some creditors due to its high debt reduction ratio of 85%.

Shanghai Huiniu Private Equity Fund publicly questioned this, arguing that as a secured creditor, it should not accept a recovery rate lower than 30%, and pointed out that Longguang had provided credit enhancement assets valued at over 16 billion yuan for some bonds.

This incident highlights the complexity of debt restructuring. Real estate companies hope to quickly shed their burdens and start anew, while investors are reluctant to wait too long and do not want to bear excessive principal losses. The issue facing investors is also very real: should they engage in a life-and-death struggle with the real estate companies, leading to a long bankruptcy liquidation process with potentially lower recovery rates, or should they seek a balance in negotiations and wait for the companies to "revive"?

Longguang's latest plan is the result of seeking balance amid this ongoing tug-of-war.

A creditor revealed that communication between Longguang and investors regarding the optimized plan is progressing smoothly, receiving relatively positive market feedback.

The advancement of domestic debt restructuring has shed a glimmer of hope on the "landing" path for Ji Haipeng, a real estate tycoon from Chaoshan, but this is far from the end.

On one hand, Longguang is still dealing with approximately 8.038 billion dollars in overseas debt. Although its restructuring plan has received support from over 80% of creditors, it still needs to wait for the final approval from the court. On the other hand, company executives have also admitted that in addition to public market bonds, there are many secured loans with banks and other financial institutions that need to be negotiated one by one, and state-owned banks are usually difficult to accept debt write-downs.

Ultimately, whether it can truly "survive" depends on the company's own ability to generate cash flow. This is also the biggest challenge facing Longguang.

In the eyes of financial institutions, Longguang is still regarded as a real estate company with good asset quality. It has many high-quality projects in the Guangdong-Hong Kong-Macao Greater Bay Area and the Yangtze River Delta, which is the cornerstone of its hope to emerge from the mire first.

For example, the luxury residential project "Kaiyue," jointly developed by Longguang and Hopson Development in Hong Kong, has a value of over 30 billion yuan, with approximately 60 units sold, bringing in over 4.1 billion Hong Kong dollars in cash.

Chen Yong, vice president of Longguang Real Estate, expressed his feelings at a recent shareholders' meeting, stating that in the past, the market often said that Longguang's lack of business diversification and insufficient national layout were disadvantages, but now the concentration of assets in the Greater Bay Area has become an advantage. "If the market warms up, the group should be able to do better," he said.

Institutions are also seeing signs of gradual market stabilization. UBS's head of real estate research for the Asia-Pacific and Greater China region, Lin Zhenhong, recently pointed out that first-tier cities are showing signs of stabilization The reality facing Ji Haipeng is that even if the debt restructuring is successful, the era of high leverage and high margins will never return. However, for proactive real estate companies like Longguang, the ending of the story may no longer be just about "survival."

Chen Cong, Chief Analyst of Infrastructure and Modern Service Industry at CITIC Securities, believes that the real estate industry is entering a phase of active innovation. The new model of real estate involves two main lines: understanding consumer preferences and developing and operating new spaces, with an upgrade, renewal, and restructuring of execution capabilities guided by new strategies.

This means that real estate is transitioning from a traditional, extensive, and fast-turnaround residential development model to a new stage.

In this process, companies that complete debt restructuring first and hold quality assets will have healthier financial conditions to embrace new development opportunities. The current painful adjustments faced by real estate companies like Longguang are aimed at securing the possibility of revitalization in the future and finding their own position in the new industry landscape.

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