E-House Foundation Shudders as It Scrambles to Finalize Debt Restructuring

The real estate services provider filed for Chapter 15 bankruptcy protection in New York after delaying a meeting with creditors to vote on a debt restructuring plan

Key Takeaways:

• E-House is seeking protection against possible asset seizure in the U.S. under Chapter 15 bankruptcy about six months after defaulting on nearly $298 million in dollar bonds
• Implementation of the company’s debt restructuring plan, set for a vote by creditors early next month, hinges on the status of convertible bonds issued to Alibaba

By Warren Yang

Time is ticking down for E-House (China) Enterprise Holdings Ltd. (2048.HK), the once-hot real estate services provider that defaulted on some of its bonds about a half year ago as its ship was broadsided by China’s struggling real estate market.

Last Wednesday, the company, which counts e-commerce giant Alibaba (BABA.US; 9988.HK) as a major shareholder, said it filed for protection under Chapter 15 of the U.S. bankruptcy code in New York. The move shields E-House from seizure of its assets in the U.S. by its creditors while it races to finalize a debt restructuring plan being worked out through a Cayman Islands court.

The ongoing drama inside E-House began after the company failed to repay nearly $300 million worth of dollar bonds that matured in April, which led to a wave of defaults on other debt securities linked to those bonds. That same month, the company managed to get the green light from a majority of the defaulted bond holders to agree to a plan through a Cayman Islands court to exchange the old notes for new ones on amended terms.

E-House originally planned to let creditors vote on the restructuring scheme at a meeting on Wednesday this week. But the company pushed it back to early next month after the bondholders requested more time to better understand the details of the plan, which were laid out in a document distributed late last month.

The delay was problematic because implementation of the plan by the end of this month was a condition to avoid a default on HK$1 billion ($131.5 million) of E-House’s convertible bonds issued to Alibaba. With the meeting now postponed, E-House said it will ask Alibaba for more time to avoid missing the deadline and triggering another default.

E-House is among the many victims of a deep property slump in China that followed a decades-long boom as the nation developed a western-style property market to replace one where all property was state-owned. Things started to go south for the sector a couple years ago, as Beijing, which previously allowed the liberal use of debt to drive real estate development, and hence economic growth, began reining in developers’ borrowing.

That made it hard for those developers to fund new projects and refinance existing debt. In addition to the policy shift, rising global interest rates are also translating into higher borrowing costs for everyone, including property firms in China. And making things worse, global rating agencies have been downgrading the group or even withdrawing their ratings completely due to their big debt loads, making it even costlier or unfeasible for them to borrow through international debt markets.

Property Woes

While inability to secure new funds has put a huge damper on new property development, Covid-19 restrictions and declining household income have also hurt demand. That’s a key factor for service agencies like E-House that depend on transactions to earn much of their money. The poster child for the sector’s woes is China Evergrande (3333.HK), the world’s most indebted real estate company, which defaulted on its debt late last year. Other defaults have come from lower-profile cases including Zhenro Properties (6158.HK) and Fantasia Holdings (1777.HK).

E-House did manage to post about 10% revenue growth last year, according to unaudited results that were disclosed in the company’s last public earnings release. But that was solely attributable to a more than 200% jump in income from digital marketing services. Sales from real estate agency and platform operations, E-House’s main businesses, dropped substantially that year. At the same time, the company had to deal with swelling personnel costs and marketing expenses, especially those incurred by Leju, an online real estate marketing company E-House acquired in November 2020.

Adding to its woes, allowances that E-House set aside to cover unpaid bills from struggling developers surged to 6.7 billion yuan ($934 million) last year, equal to more than 80% of the company’s revenue for the year, from 172.5 million yuan in 2020.

As a result, E-House suffered a 9.4 billion yuan loss last year, a sharp reversal from its profit of 439 million yuan for 2020. And the company’s cash holdings fell by more than half to 3.3 billion yuan at the end of last year, while its debt-to-equity ratio surged to more than 200% after big drops in cash and receivables, both key components of the company’s assets.

E-House hasn’t filed audited results or its annual report for last year yet, which led to suspension of its stock on Sept. 1. E-House shares closed at HK$0.69 just before the suspension, giving it a market capitalization of just about $150 million – a fraction of the $3.4 billion it was worth at the time of its flashy Hong Kong IPO in 2018, which was backed by Alibaba and a large group of its property developer customers including Evergrande. The stock’s multiples look even more depressed, with a price-to-sales (P/S) ratio of just 0.09 and a price-to-book (P/B) ratio of 0.13.

Alibaba’s next move will be critical for E-House’s survival. The two strengthened their ties last year after the e-commerce giant sold its Tmall Haofang online real estate sales platform to E-House via an equity swap. But as things stand now, it’s hard to expect Alibaba to fork out any more cash to help dig E-House out of its hole.

Alibaba may already be impatient for repayment of more than $100 million it is owed by E-House from the convertible bonds. But more fundamentally, the outlook for China’s property market remains gloomy as buyers stay cautious, even as Beijing tries to jump-start the market through measures such as cash subsidies and reductions in down payments for residential property purchases. With all those headwinds, it’s hard to make a case for fresh investment into real estate-related companies at this point.

For E-House to have any chance of turnaround, it first needs to get the debt restructuring plan approved, sooner rather than later. Then, if Alibaba agrees to hold off on declaring a default on the convertible notes, E-House will have some breathing room. But E-House has only weeks to get Alibaba and all of its other creditors on board about the restructuring scheme. Until that happens, stresses on the company’s increasingly shaky house will only grow with every passing day.

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