Houlihan Lokey Advised Modern Land (China)
Houlihan Lokey is pleased to announce the successful restructuring of USD 1.342 billion of offshore notes (the “existing notes”) issued by Modern Land (China) Co., Ltd. (Modern Land).
Modern Land is a Chinese real estate developer headquartered in Beijing. It was listed on the Hong Kong Stock Exchange in 2013 under the ticker “SEHK:1107” and has been rated as one of China’s top 100 real estate enterprises for the past seven years. Its core development philosophy revolves around the integration of green technology, comfort, and energy-saving and the digital interconnection of communities. These values are realized via the MOMA brand, which stands for Museum of Modern Architecture.
In FY 2021, Modern Land’s contracted sales amounted to c. USD 5.3 billion, with gross floor area sold of c. 3.6 million square meters. As of 31 December 2021, the company had total assets of c. USD 9.2 billion and total debt of c. USD 3.6 billion, of which c. USD 1.4 billion was offshore and the rest onshore in the PRC.
Over the past several years, the Chinese government began enacting regulations targeting the Chinese real estate market in an effort to curb speculative investment and control housing prices. As part of nationwide efforts to deleverage and promote social stability, Chinese regulatory bodies have progressively tightened lending channels and required developers to set aside a portion of pre-sale proceeds (i.e., customers prepaying for units still under development) into escrow accounts at the project level to ensure continuity of construction and property delivery. The combination of these policies along with overall macroeconomic headwinds faced by the Chinese real estate sector have exerted immense pressure on the company’s liquidity and ability to service its debt.
In November 2021, Modern Land retained Houlihan Lokey as its exclusive financial advisor to commence a holistic restructuring process following the company’s failure to pay principal and interest on its USD 250 million 12.85% offshore notes at maturity on 25 October 2021, which triggered cross-defaults on the company’s entire offshore capital structure. An ad hoc group (the “AHG”) was formed shortly after, with Kirkland & Ellis mandated as its legal counsel. Houlihan Lokey conducted financial, operational, and legal due diligence (alongside the company’s legal counsel Sidley Austin) and engaged in deal structuring negotiations with the AHG and Kirkland & Ellis. After three months of active negotiations, the company and the AHG reached agreement on restructuring terms, and a restructuring support agreement was announced on 25 February 2022. The deal was implemented via a scheme of arrangement in the Cayman Islands that was sanctioned on 5 July 2022, and the company subsequently obtained Chapter 15 recognition of the scheme in the U.S. courts on 18 July 2022. Bondholders representing approximately 95% in aggregate outstanding principal of the existing notes voted in favor of the restructuring.
Key terms of the transaction include cancellation of the existing notes, in exchange for:
- USD 22.9 million of upfront cash.
- USD 2.1 million RSA consent fee.
- USD 1.544 billion of new notes, split into five separate tranches with maturities of one to five years from the restructuring effective date (RED) and cash interest rates of 7.0%–9.0%.
- As part of the restructuring, the weighted average interest rate for the company’s offshore debt was lowered from 11.5% per annum to 8.8% per annum.
- Average extension of approximately five years from the default date and 3.8 years from RED.
- The company has the option to pay PIK interest in lieu of cash for the first two years to conserve cash flow, given the uncertain operating environment.
The Modern Land transaction is a high-profile transaction in Asia and the first real estate developer to complete a holistic restructuring in the current Chinese real estate downturn (compared to smaller exchange offers conducted by peers during the same period). This successful restructuring has helped stabilize the operations of the company and restore confidence both onshore and offshore and also facilitates the company to issue its audited financials and resumption of trading on the Hong Kong Stock Exchange.