China property crisis: Aoyuan’s US$6 billion debt plan jolted by creditor dissent

China Aoyuan Group is standing by for a pivotal Hong Kong court decision on its restructuring plan, a ruling that may accelerate the end of its tussles with creditors over US$6 billion of offshore debt.

After a two-day trial over a creditor’s objection to the offshore plan offered by the defaulted developer ended earlier this week, Judge Jonathan Harris said he will deliver his decision on Thursday.

Harris’ approval would enable the Guangzhou-based developer to clear a major hurdle in appeasing creditors and quickly shift to implementing the settlement terms. A denial would send Aoyuan back to negotiations with creditors that may drag out its two-year saga since its first default and further sap precious resources.

Any early rulings from the city’s courts are closely watched given the slow pace of negotiations of Chinese developers, and may set legal precedents impacting bigger trials such as for China Evergrande Group.

Aoyuan’s offshore plan has been approved by a majority of its creditors. A Hong Kong court sanction of it seemed merely a formality until one of the objecting creditors petitioned the court to deny the plan.

Harris will make a call after considering the two sides’ arguments, largely over fairness in treatment of creditor classes and the legitimacy of Aoyuan’s assessment in how much investors would recover.

Under the plan’s terms, creditors are expected to get new notes, shares in the company, convertible bonds and perpetual securities in exchange for their old notes.

Aoyuan’s plan to classify creditors into various classes is questionable and there is a stark difference in how they are compensated in the restructuring, the creditor’s lawyer said during the trial. The name of the creditor was referred simply to as “Ping An” in the court.

The company’s legal representative and financial adviser argued that the difference was because of different guarantee structures and seniority of claims.

Aoyuan expects some creditors to recover about 36 per cent of what they are owed, whereas the creditor disputing the plan said a report it commissioned showed a 0.7 per cent recovery.

That is partially because the company had not taken into account the worsening market conditions in 2023, Ping An’s lawyer said. Its cash-flow assumptions also are rosy, she added.

10:57

Boom, bust and borrow: Has China’s housing market tanked?

Boom, bust and borrow: Has China’s housing market tanked?

Patrick Cowley, a financial adviser to Aoyuan, countered that the creditor’s report failed to account for the latest debt level. The company’s cash flow forecast is based on the assumption that restructuring will normalise its business and lead to new project financing, he said.

Once ranked among China’s top 30 developers by sales, Aoyuan’s dollar notes were priced at around 2 cents, indicating investors do not expect to get paid much, according to Bloomberg-compiled prices.

Aoyuan has made efforts to ensure their offshore restructuring plan would be processed without hindrance. Last month, the company filed for Chapter 15 bankruptcy in New York to seek US court recognition for its offshore debt restructuring and ward off litigation.

Without US court recognition, “there is litigation risk that dissenting holders of the existing public notes may file actions to enforce their claims in the US courts even after the Hong Kong schemes are sanctioned by the Hong Kong court”, it said then.