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China’s Kaisa under audit on order of Guangdong government

Regulators tentatively agree that developer can cover debts.

China's Kaisa under audit on order of Guangdong government

PwC is auditing the assets of Kaisa Group Holdings on the order of the government of southeast China’s Guangdong Province to assess the troubled developer’s financial condition, Caixin learned.

Kaisa is one of a raft of liquidity-squeezed property developers in China, including China Evergrande Group, whose tenuous condition is shaking global bond markets. The company is known as China’s first developer to default on dollar debt back in 2015 and was labeled a defaulter again after it failed to repay a $400 million dollar bond that matured on Dec. 7.

The Guangdong government ordered the Kaisa audit in early January, sources close to the matter said. PwC, also known as PricewaterhouseCoopers, demanded that Kaisa units submit project information such as loan contract documents but no large audit or spot checks have been carried out, the sources said.

“The ongoing audit is seemingly not a thorough one,” a person close to Kaisa said. “Instead, it’s just for some special purpose.” The government wants to determine whether Kaisa is solvent, said the person, who declined to be named.

PwC has not published results of the audit, but Caixin learned that regulators have preliminarily agreed that Kaisa has the ability to cover its debts.

The result will likely be a positive signal to the market, but Kaisa’s debt relief will be a time-consuming task, the person said.

According to the company’s financial report, Kaisa had total assets of 319.1 billion yuan ($50 billion) as of the end of June 2021, with liabilities of 237.7 billion yuan. But like most Chinese developers, Kaisa also has large off-balance sheet liabilities that are difficult to estimate. Kaisa President Mai Fan told investors in November that the company had 12.8 billion yuan of principal and interest outstanding in wealth management products, which are off Kaisa’s balance sheet.

Kaisa’s financial woes were revealed after the company abruptly canceled meetings with investors in October, sending its dollar bonds lower. Subsequent downgrades by global credit rating agencies caused a further sell-off of shares. In November, Kaisa missed payments on wealth management products it guaranteed, fueling greater concerns over its liquidity.

Worries about the company’s financial stress further worsened Kaisa’s ability to access new funding and sell projects, escalating its liquidity crunch.
Kaisa has stepped up asset sales to raise capital. The company is trying to sell 18 properties in Shenzhen — mainly urban renewal projects — with a total valuation of 81.8 billion yuan. The list was expanded to 25 projects in November but no deals have been made.

Caixin learned that in early November several state-backed companies, including China Resources Land, China Merchants Shekou Industrial Zone Holdings and Zhuhai Huafa Group, held talks with Kaisa on possible asset purchases but no deals were made amid disagreements over price.

The Guangdong government also stepped in to help Kaisa, among other embattled developers, to approach potential state-backed buyers, Caixin learned.

Kaisa has been in talks with developers, including Yuexiu Property, China Poly Group and Gemdale Group, for asset sales. The companies are interested in only a few projects on Kaisa’s for-sale list, rather than a major takeover, a source said.

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