3333.HK
Evergrande liquidation, the end of a wild era

International bondholders have low expectations for recouping their money as the world’s most indebted developer is finally ordered to liquidate

Key Takeaways:

  • How much international investors can recoup from Evergrande’s liquidation will depend on decisions made by governments and courts on the Chinese Mainland
  • 90% of the Evergrande’s assets are on the Mainland, making it impossible to carry out a Hong Kong court’s liquidation order without help from Mainland courts

     

By Ken Lo 

After months of delays, a Hong Kong judge finally pulled the trigger on China Evergrande Group (3333.HK) last week by ordering the debt-laden developer to liquidate, ending a saga that began with a request from one of its creditors back in 2022. That ruling followed seven delays in a decision on the matter, marking an unofficial end to an era of years go-go expansion by China’s overheated property sector.

China Evergrande’s stock was halted before the Jan. 29 ruling at HK$0.163 per share, valuing the company at just HK$2.15 billion ($275 million), a tiny fraction of the HK$400 billion it was worth at its peak. Among other things, the company’s stakes in its Hong Kong-listed EV subsidiary China Evergrande New Energy Vehicle Group Ltd. (0708.HK), and property management services company Evergrande Property Services Group Ltd. (6666.HK), are likely to be seized by liquidators.

According to the court order, two staffers of consulting firm of Alvarez & Marsal, Edward Simon Middleton and Wing Sze Tiffany Wong, will act as joint liquidators.

Nearly all of Evergrande’s property development business is on the Chinese Mainland through its locally based Evergrande Property unit. Most of its debt, both at home and abroad, was taken on to finance its Mainland operations, including big sums owed to its suppliers, construction partners and financial backers.

Its interim financial statement last year showed its net liabilities stood at a whopping 2.39 trillion yuan ($336 billion) at the end of last June, while it had just 13.4 billion yuan ($1.87 billion) in cash. The company listed 17 defaulted dollar-denominated bonds as it tried in vain to forge a restructuring plan with its foreign creditors involving more than $19 billion in debt.

Evergrande Managing Director Xiao En, responding to media queries, said the court-ordered liquidation applied to the company’s overseas business, affecting its Hong Kong-listed China Evergrande unit. He added the company would do its best to keep its Mainland-based Evergrande Property afloat and move ahead with key priorities, including delivery of homes still being built. 

He added the company would continue to work with the liquidators to fulfill their duties while further winding down its debt.

Failed restructuring plan

Even as the Hong Kong judge made her ruling, the company’s Mainland-based Evergrande Property unit was the target of an investigation by the Chinese securities regulator. That case’s suspects include company Chairman Hui Ka Yan, whose lack of availability for the Hong Kong case made a restructuring of the company’s foreign debt effectively a mission impossible.

Evergrande has provided only a smattering of information to its offshore creditors since defaulting on two dollar-denominated bonds in late 2021, making it extremely difficult for investors to get a full picture of the many challenges facing the company. Issues like how the liquidation of the Hong Kong entity can proceed – and how much offshore investors might hope to recoup – will largely depend on decisions by Mainland-based authorities and courts.

In 2021, Mainland and Hong Kong courts agreed to coordinate their separate bankruptcy proceedings, with Hong Kong liquidators allowed to petition courts in the cities of Shanghai, Shenzhen and Xiamen. But final decisions will be made by the Mainland courts, which may refuse to recognize the Hong Kong court order and assist in its implementation. In other words, failure to win support from the Mainland court system will make it very hard to complete the Hong Kong liquidation proceedings.

Paul Lam Ting-kwok, from Hong Kong’s Department of Justice, acknowledged last November that Mainland courts might refuse to recognize a Hong Kong liquidation order. A Shenzhen court previously recognized the Hong Kong court’s authority when it appointed liquidators in the case of Samson Paper Holdings Ltd. in 2021. But that case is regarded as an exception rather than the rule.

Even if Mainland courts recognize the liquidation order, cooperation from the company’s many domestic creditors will also be critical. Priority given to such onshore creditors over their offshore peers means it will be that much harder for offshore creditors to get compensated.

The liquidation order could be just the start for China’s embattled developers. Earlier rumors said that creditors of Country Garden(2007.HK) would also seek to liquidate the company, and some Hong Kong banks would take over its Hong Kong assets, even as company sources were cited in media reports denying such claims. But such denials are common by Chinese companies, even when what they are denying is really happening.

Ensuring home deliveries 

Beijing has instructed developers to deliver pre-sold units and fulfill their social responsibility to deliver homes, many of which are midway through construction that has often ground to a halt due to lack of funds. But that requires more money, typically obtained by selling more properties, which is difficult in the current weak environment of falling home prices.

Regardless of whether the liquidation process moves ahead, Evergrande will be in a virtual state of bankruptcy and its bonds will trade at less than 20% of their face value, pointed out Hong Hao, partner and chief economist of Hong Kong-based GROW Investment Group.

According to a report from the property-focused China Index Academy, existing home prices in 100 Chinese cities fell by an average of 0.56% month-on-month in January, marking the 21st consecutive monthly decline. Developers in many cities are cutting prices to drum up sales. The report said that following the easing of purchase restrictions in Shanghai and Guangzhou, other top-tier cities will take similar actions, and second-tier cities might remove purchase restrictions altogether to attract buyers. The Academy also predicted down payment requirements will fall further for first-time and second-home buyers in major cities.

Chris Beddor, deputy director of research at Gavekal Dragonomics, told Reuters that in many ways the Evergrande case represented the broader woes of China’s property sector, whose prolonged slump is having a chilling effect on consumer sentiment. Data shows that potential buyers are not willing to purchase pre-sold units from struggling developers for fear of losing their money, further aggravating the situation for companies like Evergrande.

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