A Chinese property developer whose default in 2021 has since fed into a broader industry rout is facing resistance to its restructuring plan from a major shareholder.
Fantasia Holdings Group Co.’s second-biggest shareholder TCL Industries Holdings Co. opposes the terms of the debt-to-equity swaps, a key part of the restructuring proposal that would dilute shareholders’ stakes, according to people familiar with the matter who asked not to be identified discussing private matters. TCL is seeking equitable treatment between minority investors and the controlling shareholder, one of the people said.
Hong Kong-listed Fantasia needs to hold a shareholder meeting to decide on the issuance of shares for the proposed debt swap, with support from at least 50% of voting shareholders required. TCL, which has a 17.5% shareholding, may vote against the issuance of new shares if current negotiations sour, said one of the people. It remains unclear when any shareholder meeting would take place.
Fantasia said in a response to Bloomberg that if TCL opposes the proposal, the restructuring efforts may fail, and in the worst-case scenario, shareholders would get zero recovery. TCL Industries didn’t respond to an email seeking comment.
Fantasia has already secured creditors’ support for its debt restructuring, meaning that any disruption at this stage could undermine an already advanced process. More broadly, the development highlights the clout that key shareholders may have as equity becomes a popular element in Chinese defaulters’ restructuring plans. Risks are already rising for weaker developers in the stock market, where financial strains are threatening the listing status for some.
After a 15-month wait, Fantasia revealed in January a restructuring blueprint that seeks to swap $1.3 billion of offshore borrowings into shares and extend some debt. If implemented, the plan would result in offshore creditors collectively owning 52.6% of the new Fantasia. TCL would be left with merely 1%, and other minority shareholders with just 1.4%.
Fantasia, which is based in the southern coastal province of Guangdong and is controlled by founder Zeng Jie, became a defaulter in October 2021. The controlling shareholder would hold at least a 45% equity interest after the restructuring, based on the current plan, down from 57.4% as of the end of June 2021, according to the latest data available.
Any vote may hinge on how rules concerning the controlling shareholder are applied. The Hong Kong exchange requires any shareholder and his or her close associates to abstain from voting if such a shareholder has a material interest in a transaction. In the event that Fantasia’s controlling shareholder isn’t allowed to vote, it would remove a major obstacle for TCL to attempt to block the share issuance plan.
Founder Control
Fantasia intended to offer a revised plan, leaving minority shareholders more equity stake post-restructuring, but TCL didn’t agree to the details, according to people familiar with the discussions.
Needing to get shareholder approval to issue shares for any debt swap “does put some leverage in the hands of existing shareholders but only so much,” said Daniel Margulies, a partner at Dechert LLP who specializes in restructuring matters in Asia.
To some, preserving a founder’s control of a company is key to maintaining normal business operations after suffering a delinquency.
“The controlling shareholder will remain the largest individual shareholder, so they have a vested interest in continuing to guide the company and that interests are aligned,” said Brandon Gale, head of Asia restructuring at Houlihan Lokey Inc., which acts as financial adviser to Fantasia on its restructuring. Gale was speaking at a recent press event.
(Updates with more details in the eighth paragraph)