SINO-OCEAN SERV has been given a chance to "resurrect".

Author | Cao Anxun

Editor | Zhou Zhiyu

The Chinese real estate industry is entering a critical moment. Whether it's private real estate enterprises or state-owned enterprises, they are all accelerating risk clearance. People involved in this process are witnessing and creating history.

Over a month ago, two major shareholders of SINO-OCEAN GP dispatched a joint working group to settle in SINO-OCEAN GP, which was rare in the history of real estate. Over a month later, SINO-OCEAN GP obtained an opportunity for debt waiver default, which is also the first in the industry.

On August 14th, SINO-OCEAN GP announced that it defaulted on its 6% guaranteed notes due in 2024 because it failed to pay the interest (USD 20.94 million) for the period from January 30th to July 30th, 2023. Trading of the notes on the Hong Kong Stock Exchange has been suspended since 9:00 am on August 14th.

Similar to previous troubled real estate companies, debt default, trading suspension, and restructuring are not new. However, this time is somewhat different. SINO-OCEAN GP has activated its "resurrection" skill.

According to the announcement, SINO-OCEAN GP will hold a bondholders' meeting on August 17th to vote on a special resolution regarding the notes. If the special resolution is passed, the default event mentioned above will be waived.

On August 16th, SINO-OCEAN GP issued a statement on the Shanghai Stock Exchange, stating that the number of attendees and the voting support have reached the required proportion. If the conditions stated in the memorandum and notice are agreed upon, the default event will be waived around August 18th, 2023, without expected impact on the company's operations, financial management, external financing, and debt repayment capacity.

According to the previous revision of the notes by SINO-OCEAN GP, the interest for this period will be postponed until September 30th. SINO-OCEAN GP has gained some breathing room.

In response, Zhang Bo, the director of the 58 Anjuke Research Institute, pointed out that as long as the bondholders' meeting reaches the agreed proportion, a special resolution can be formed. In most cases, it involves extending the payment of the bonds with related conditions. However, SINO-OCEAN GP's special resolution is about waiving the default.

Bai Wenxi, Chief Economist of IPG China, stated that reaching an agreement on waiving the default responsibility between the issuer and the bondholders is equivalent to amending the bond regulations or entering into a supplementary agreement, which is certainly permissible.

This also means that SINO-OCEAN GP has restored its creditworthiness, continuing to adhere to "zero default," and it also means that the debt risk is contained within individual bonds, avoiding cross-default.

This is also a landmark event in the risk clearance of the real estate industry, opening up new ideas for debt repayment and releasing a new signal encouraging real estate enterprises and relevant bondholders to negotiate and rebuild credit.

Yan Yuejin, Director of the E-House Research Institute, said that this is the first case of default waiver in the industry, which has never been heard of before. For the industry, convening bondholders' meetings before and after default for discussion is becoming a clearer and more efficient solution, improving the efficiency of debt restructuring. SINO-OCEAN GP's actions also provide an example for the industry to follow. Chief Researcher Li Yujia of the Guangdong Housing Policy Research Center believes that it would be better for all creditors to give the company some buffer time rather than pushing for immediate debt collection, as the results may be much better.

In the past two years, once a real estate company defaults, it triggers cross-default clauses, making it unable to raise funds in the public market. This leads to a rapid deterioration of the company's liquidity and credit situation, exacerbating operational difficulties, and eventually forcing the company into overall debt restructuring.

Especially since the controversial "lying flat" trend started with China Evergrande, market and investors' trust in the actual controllers of private real estate companies has been shaken. Following China Evergrande, Sunac, R&F, Agile, and JiaZhaoye have all encountered difficulties, and debt restructuring has become the standard solution. It is difficult to find a "white knight" to save the real estate companies.

So far, companies such as China Fortune Land Development, R&F Properties, and Sunac China have successfully implemented debt restructuring plans, including extensions and debt-to-equity swaps, both domestically and overseas, buying time for their operations.

Compared to the lengthy and complex overall debt restructuring and credit rebuilding processes, SINO-OCEAN GP's "waiver of default" does not damage its credit, but instead provides more time for normal financing and operations. During this hard-won time, real estate companies may find a turning point.

"The willingness of creditors to waive defaults for SINO-OCEAN GP also indicates a certain level of confidence in the company," analyzed a Hong Kong institution. With frequent policy interventions in the current market and signs of sales recovery, everyone is slightly more optimistic about the future. Of course, SINO-OCEAN GP's background as a state-owned enterprise is also a factor.

The same person also believes that SINO-OCEAN GP's debt disposal can provide a reference for Country Garden's debt restructuring.

The night is darkest just before the dawn. Fortunately, in the past two months, there has been a warming trend in industry policies. After the Central Political Bureau meeting on July 24 set the tone for optimizing the real estate market policies, new policies have been implemented rapidly. Examples include the 15 new regulations in Zhengzhou, multiple policy optimizations in Nanjing, and the draft opinions from the Jiangsu Provincial Development and Reform Commission, all aimed at further stimulating housing demand.

With the continuous improvement of policies, there is hope for recovery in the sales sector. CITIC Securities predicts that the fundamentals of the real estate market in 2023 will be high at both ends and low in the middle, with the third quarter possibly being the lowest point of the year.

"The current downward trend in fundamentals is not only the orderly release of long-term industry pressures but also a necessary adjustment before the industry's sales rebound at the end of 2023."

Before that happens, real estate companies still need to employ various strategies to maintain their credit, operations, and delivery of completed projects. This tests the survival will, financial management, and operational capabilities of real estate companies.

From Evergrande to Country Garden to SINO-OCEAN GP, real estate companies have embarked on different paths.