What is the recovery rate for creditors? A comparative analysis of Sunac, CIFI, and JINKE PROPERTY

According to Zhitong Finance APP, recently, the debt restructuring of distressed real estate companies has seen intensive breakthroughs. On October 16, CIFI (00884) announced the specific details of its overseas debt restructuring plan and the related measures the company will take, including the issuance of mandatory convertible bonds (MCB), the conversion of major shareholder loans into equity, and a long-term team equity incentive plan. The above plans will seek approval at a special shareholders' meeting on October 31.

Two days earlier, on October 14, Sunac announced the progress of its second round of overseas restructuring plan, stating that the plan has been approved by 94.5% of the creditors in terms of the debt amount, and a hearing will be held at the Hong Kong High Court on November 5.

Earlier, on September 24, Jinke announced that it had signed a trust contract for bankruptcy reorganization special service with CITIC Trust Co., Ltd., marking the completion of the legal framework for its key debt repayment mechanism, and the reorganization has entered the substantive implementation phase. At the same time, after completing an investment of 2.628 billion, the reorganization investor has become Jinke's largest shareholder.

A horizontal comparison of the restructuring plans of the three companies shows that debt-to-equity swaps are an important method used consistently for debt reduction. All three companies are implementing debt-to-equity swaps through the issuance of new shares, which can increase the company's equity capital while reducing debt; at the same time, all three companies have set certain terms in their plans to ensure that major shareholders maintain control over the company, achieving a long-term interest binding between major shareholders and creditors.

Debt-to-equity swaps, recovery rates depend on stock prices

Jinke's bankruptcy reorganization plan includes three parts: cash repayment of small claims up to 50,000, conversion of every 100 yuan of debt into 2.53 shares, and conversion of every 100 yuan of debt into 100 trust beneficiary rights. For the recovery rate of the debt, Jinke has provided a clear calculation logic: (cash repayment amount + number of shares from debt-to-equity swap × stock price + number of trust beneficiary rights × asset value of 0.019 yuan per share) ÷ total amount of ordinary debt. According to this calculation logic, for large debtors, the most significant factor affecting the recovery rate is the fluctuation of Jinke's stock price. Taking a debt of 10 million as an example, if calculated at the current Jinke stock price of 1.38 yuan per share, it can recover 50,000 in cash + a market value of approximately 347,400 in stocks + approximately 189,000 in trust asset value, totaling 586,400, with a recovery rate of less than 6%; if Jinke's stock price rises to the 6.46 yuan per share estimated by its financial advisor (i.e., a 4.7 times increase in stock price), it can recover 50,000 in cash + a market value of approximately 1,626,000 in stocks + approximately 189,000 in trust asset value, totaling 1,865,000, with a recovery rate exceeding 18%.

Considering that Sunac and CIFI have not provided clear recovery rate calculation logic, we can use Jinke's calculation logic to estimate their recovery rates.

Sunac's plan involves converting 75% of the debt at 6.8 HKD per share and 25% of the debt at 3.85 HKD per share. After deducting the 23% transferred to major shareholders under the "equity structure stabilization plan," a debt of 10 million HKD can be converted into approximately 1.35 million shares. If calculated at the current Sunac stock price of 1.52 HKD per share, it can recover approximately 2.052 million HKD, with a recovery rate of about 20%; if Sunac's stock price also rises 4.7 times in the future, the recovery rate for creditors is expected to exceed 80% CIFI's plan includes a total of $40 million in upfront cash, $4.1 billion in convertible bonds (conversion price of HKD 1.6 per share), and $2.6 billion in retained debt. If creditors fully choose to convert, a HKD 10 million debt will be converted into 5.625 million shares after a 10% debt reduction according to the rules. Based on CIFI's current stock price of HKD 0.22 per share, approximately HKD 1.238 million can be recovered, and combined with the upfront cash, the recovery rate exceeds 13%; if CIFI's stock price rises 4.7 times in the future, the recovery rate for creditors could exceed 60%. Considering that CIFI is currently not included in the Hong Kong Stock Connect and its market value is far lower than Sunac (price-to-book ratio: CIFI 0.26, Sunac 0.69), the significant increase in equity after the restructuring and conversion is expected to enhance market value and liquidity, potentially helping CIFI return to the Hong Kong Stock Connect, with its future stock price possibly having more room for growth compared to Sunac. It is anticipated that the recovery rate for creditors could be comparable to or even surpass that of Sunac.

It can be seen that the subsequent performance of the company's stock price has a significant impact on the recovery rate for creditors. Only with sustainable business operations, gradual recovery of profitability, and capital market valuation can more benefits be gained for creditors.

Establish mechanisms to ensure major shareholders' control and bind interests with creditors

A horizontal comparison shows that the plans of the three companies ensure the status of the actual controllers or major shareholders of the restructuring investors, with their future earnings highly linked to the company's stock price growth, which is beneficial in incentivizing them to focus on company operations, restore profitability, and ensure the consistency of interests between the actual controllers/restructuring investors and creditors, as well as minority shareholders.

Jinke's restructuring investors include industrial investors and financial investors, with the former subscribing to 1.2 billion newly issued Jinke shares at HKD 0.63 per share, and the latter subscribing to 1.8 billion newly issued Jinke shares at HKD 1.04 per share. The total investment from restructuring investors amounts to HKD 2.628 billion, acquiring nearly 30% of Jinke's equity post-restructuring and 7 out of 9 board seats, giving them absolute control over the company.

Sunac has launched a "stable equity structure plan," where approximately $23 of the new mandatory convertible bonds issued for every $100 principal allocated to creditors will be issued to major shareholders. It is stipulated that major shareholders cannot dispose of, mortgage, or transfer these restricted stocks within six years from the effective date of the restructuring, but they retain voting rights for the restricted stocks. This design ensures that Sun Hongbin's controlling stake in Sunac remains at 23%, maintaining control over the company.

CIFI's plan includes full conversion of the actual controller's over HKD 500 million loan to the listed company and a "long-term team equity incentive plan" covering the actual controller and mid-to-senior management. Through the design of the conversion and incentive plan, the Lin family, the actual controllers of CIFI, will maintain a shareholding ratio of around 25%, avoiding excessive dilution of equity and ensuring that CIFI's control remains unchanged; additionally, the ten-year "long-term team equity incentive plan" includes multiple clauses closely linked to quantifiable performance indicators, ensuring a deep binding of long-term interests between the actual controllers, management team, and creditors. Maintaining the major shareholder's position through equity incentives is also a common method in restructuring and is the foundation for the restructuring to take effect Industry insiders analyze that if the restructuring leads to unstable control of the company or frequent changes in the core management team, it would be a further blow to companies in a recovery phase. For creditors hoping for an increase in the company's stock price, this is even more detrimental. Therefore, designing terms in the corporate plan that retain the control of major shareholders and include management incentive plans to deeply bind major shareholders and the management team is beneficial for the coherence of the company's strategy and the long-term interests of creditors and all shareholders