Decoding Oceanwide's Debt Restructuring Strategy

The financial landscape of the real estate market in China has taken a significant turn, especially for prominent developers like Far Ocean Group. After extensive negotiations with overseas creditors, this developer recently made headlines by successfully advancing its offshore debt restructuring plan during the festive period of the Spring Festival, particularly gaining approval for the intricate UK restructuring plan—a crucial milestone in their recovery efforts.

Not only has Far Ocean Group made strides, but it also reflects a broader trend where several leading Chinese real estate firms such as Sunac China and Country Garden are similarly navigating the turbulent waters of debt management, highlighting an urgent and strategic shift in the industry to alleviate mounting financial pressures.

The journey of Far Ocean Group's restructuring process was far from smooth. Beginning in July 2023, the company found itself grappling with severe liquidity issues, leading to the necessity of addressing its domestic debts first. By January 2024, it reported a successful extension of its ten domestic bonds, which collectively involved an impressive amount of 18.266 billion yuan. This was merely the beginning of a complex and multifaceted restructuring saga.

Initially unveiled on July 18, 2023, the restructuring plan proposed by Far Ocean Group encompassed a range of existing loans including syndicate loans and bilateral loans, amounting to an outstanding principal of around $5.636 billion. The proposed strategy aimed to provide creditors with two categories of debt instruments: new debts and mandatory convertible bonds—or alternatively, new perpetual bonds. Essentially, the plan indicated that Far Ocean would issue $2.2 billion in new debts to creditors, fortified by comprehensive credit enhancement mechanisms, including new loans and notes. This new financial instrument would begin repayment in the third year of the restructuring, bearing an annual interest rate of 3%, distributed semiannually.

The approach utilized by Far Ocean Group involved categorizing its offshore creditors into four distinct groups labeled A, B, C, and D. Group A consisted of syndicate loans amounting to $1.918 billion, whereas Groups B and C were composed of bonds with debts of $1.92 billion and $1.198 billion, respectively. Group D encompassed $600 million in perpetual bonds.

However, the initial reception to this restructuring proposal was marked by dissatisfaction among certain overseas creditors, leading to public dissent as some lenders took to advertisements in Hong Kong media expressing their objections. Critics argued that the restructuring was overly favorable to shareholders and creditors within Group A, drawing attention to the lack of substantial financial backing from Far Ocean's major stakeholder, China Life Insurance.

This restructuring initiative is further complicated by the involvement of two legal jurisdictions. While Group A fell under Hong Kong Special Administrative Region law, Groups B, C, and D were governed by English law. The procedural path mandated that the restructuring plan must first undergo a hearing in a UK court before any Hong Kong-related hearings could proceed.

Under the stipulations of the UK restructuring plan, if creditors holding 75% of the debt in a particular group consent to the proposal, and if Far Ocean can demonstrate that the restructuring is both fair and optimal, a judge would have the authority to rule in favor of executing the plan.

By September of last year, it was reported that over 75% of creditors in Group A had signed on to support the restructuring agreement. However, support from the remaining groups remained tepid, prompting ongoing negotiations between those creditors and Far Ocean Group to reach a resolution.

Eventually, the decisive moment came on November 25, 2023, when Far Ocean announced the voting outcomes from the creditors' meeting. Group A garnered unanimous backing from 100% of its creditors, while Group C achieved an approval rate of 81.5%. Conversely, Groups B and D saw considerably lower approval rates at 47.7% and 34.9%, respectively. Following this, hearings for the UK restructuring plan were held from January 15 to 20, culminating in a favorable ruling by the English court on February 3, 2024.

The successful validation of the UK restructuring plan paved the way for an official announcement by Far Ocean Group on February 6, confirming that the plan's effective date would commence on February 5, 2025. With this legal affirmation, Far Ocean was poised to proceed to the next step in its restructuring process.

Despite preliminary progress, the Hong Kong court had initially scheduled a hearing for the local plan on January 24. Still, in light of the UK court's ruling, Far Ocean sought a postponement to February 19 to synchronize both legal proceedings. Encouragingly, the Hong Kong plan had previously received full support from creditors, thus presenting a positive outlook for the overall restructuring process.

As we entered 2025, it was evident that Far Ocean's push for debt resolution was part of a larger phenomenon within the Chinese real estate sector. Numerous companies, including Sunac and Longfor Group, have accelerated their debt restructuring efforts, marking a critical pivot in the industry. On January 9, Country Garden disclosed that its offshore debt restructuring could potentially erase up to $11.6 billion of its liabilities, providing various options to creditors such as buybacks and mandatory convertible bonds.

The competitive wave of restructuring also extends to Sunac, which announced on January 21 that its restructuring proposal for ten bonds had received the green light from bondholders. The restructuring encompassed 15.4 billion yuan in domestic debts, successfully establishing itself as the first firm in the industry to complete a comprehensive restructuring of domestic company bonds.

Liu Shui, the Director of Enterprise Research at the China Index Academy, emphasized that while these restructurings mark significant progress in escaping debt crises, companies must continue to enhance their operational fundamentals to achieve long-term stability. Following supportive policies introduced in late September, market sales in core urban areas have seen a resurgence, and it is crucial for businesses to leverage this window of opportunity to boost the quality of their projects and intensify marketing strategies. Furthermore, engaging proactively with government agencies regarding land policy adjustments could facilitate capital recovery and inventory turnover.

Far Ocean Group has persistently managed its assets post-crisis, offloading stakes from key projects such as Beijing Yidihang Phase I and Beijing Lize Business District Center, successfully recouping over 17 billion yuan. Nevertheless, the ongoing financial landscape remains challenging, as Far Ocean's total sales for 2024 reached approximately 35.16 billion yuan, reflecting a continued decline in its sales scale over three consecutive years.