The Chinese Evergrande Group received a liquidation order from the Hong Kong court, which marked the beginning of a complex process to carve up one of the main casualties of the largest property crisis, which had a widespread negative impact on the state of the world’s second-largest economy.
The relevant decision was made on Monday, January 29, by a judge from Hong Kong, Linda Chan. This ends a kind of story of the misadventures of Evergrande, which accumulated liabilities worth more than $300 billion during the debt-fueled boom of the real estate sector in China before it became one of the main forms of manifestation of the market collapse, which so far shows no signs of ending.
On Monday, the Asian country’s largest developer, which received a liquidation order, was valued at $275 million before trading in its shares was suspended. This indicator is almost 100% below the figure peak level.
The collapse of Evergrande is currently what can be described as the largest event in the crisis that caused China’s economic growth to slow down. Moreover, the current realities have provoked a record number of defaults by developers in the Asian country.
The media also note that the liquidation of Evergarde will be a test example of the reach of Hong Kong courts in China, where most of the company’s assets reside. Any new management will have to take this case into account when selling securities in the area, where there is currently a clear shortage of liquidity and a critically low level of confidence.
The liquidation process of China’s largest developer will also be closely watched by global investors, many of whom have pulled billions of dollars from mainland China amid concerns about unequal capital conditions. The corresponding sentiments were formed based on a clear awareness of the fact that the head of the People’s Republic of China, Xi Jinping, will take action to strengthen the role of the Communist Party as a structure that intensively controls the processes taking place in the sphere of the economy.
Perhaps Beijing will still be forced to balance competing priorities. The likelihood of such decisions is high, as the Chinese authorities have officially stated their commitment to increasing the level of trust on the part of investors. Beijing also intends to ensure the completion of the construction of unfinished homes and take measures to ensure the financial system’s stability to problems in the real estate sector.
Lance Jiang, a restructuring partner at Ashurst law firm, says the market will pay close attention to what liquidators can do after being appointed, paying particular attention to their ability to achieve recognition in any of China’s three designated courts. He also noted that liquidators will have limited enforcement powers over onshore assets in mainland China if they fail to get such recognition.
Since the beginning of the crisis in the real estate sector, Hong Kong courts have issued at least three liquidation orders for Chinese developers but none of them is comparable to Evergrande in terms of complexity, size of assets, and number of stakeholders. There are also currently signs that the liquidation of smaller companies Jiayuan International Group and Yango Justice International Ltd., a unit of Yango Group Co., has made significant progress.
Insolvency proceedings initiated by Hong Kong have limited recognition in China, whose courts can appoint managers in their jurisdictions. Against this background, the issue of the requirements that were presented to the holders of dollar-denominated Evergrande bonds for $17 billion that fall under the proposed restructuring plan remains unresolved.
Media data indicates that at the end of last week, most developer’s dollar notes traded at around 1.5 cents. This is a sign of low investor expectations regarding repayment.
Linda Chan named Alvarez & Marsal Inc., a restructuring consulting firm with a cases list that includes Lehman Brothers Holdings Inc., as the liquidator overseeing the process. The judge appointed Eddie Middleton and Tiffany Wong, who are the managing directors of the mentioned firm, as joint liquidators.
Shawn Siu, Chief Executive Officer of Evergrande, said that the company had made every possible effort to prevent the most negative scenario and regretted the liquidation order. He also said that the firm will ensure home delivery and steadily promote the normal operation of the group. Separately, Shawn Siu announced his intention to keep in communication with the appointed liquidator.
The liquidation petition was filed in June 2022 by Top Shine Global Limited of Intershore Consult (Samoa) Ltd., a strategic investor in the homebuilder’s online sales platform. The developer’s offshore restructuring plan also covers debt claims for other offshore obligations for $14.7 billion. The relevant information is contained in the restructuring document dated March last year.
Linda Chan noted in her ruling that Evergrande had not demonstrated any shreds of evidence that the court had a useful purpose in adjourning consideration of the petition. She stated that there was no full-fledged restructuring proposal and no viable proposal that could receive the support of the majority of creditors.
With a high degree of probability, the liquidator will have to work hard. Most of Evergrande’s projects are managed by local units, which could be difficult for the offshore liquidator to seize. The data contained in the lawsuit indicates that more than 90% of the developer’s assets are located in mainland China.
The founder and chairman of the board of Evergrande, Hui Ka Yan, was placed under police control in September on suspicion of committing crimes. Against this background, there was a risk of complicating the trial.
Evergrande has been China’s largest real estate developer over the past decade in terms of sales volume. The company first defaulted on dollar-denominated bonds in December 2021. After that, a shock wave began in the Chinese markets. The unfavorable situation provoked negative sentiment among investors. Evergrande failed to reach an agreement with creditors.
Country Garden Holdings Co., which was also one of China’s largest real estate developers, is currently in the spotlight of creditors due to its default in October.
In November, it became known about the agreement on the restructuring of Sunac China Holdings Ltd., another major developer from the Asian country. Against this background, investors have hope for an improvement in the situation. At the same time, Beijing is making efforts to overcome the crisis in the real estate sector. Chinese authorities are taking measures to revive home sales and provide liquidity to developers who are facing a debt burden.
Jenny Zeng, director of investments at Allianz Global Fixed Income Investors’ Asian unit, says that the market should focus on companies that have managed to survive the worst credit cycle in history. According to the expert, the importance of Evergrande as a player in the real estate sector is already insignificant. Jenny Zeng stated that it is now necessary to focus on the survivors.
Evergrande proposed the latest restructuring plan in the current month and intends to provide new terms by March. Linda Chan, as mentioned above, was not satisfied with this plan. Evergrande’s efforts did not give the company more breathing room.
Fergus Saurin, a partner at the law firm Kirkland & Ellis LLP, and legal adviser to a special group of creditors, said he was ready, willing, and able to conclude a deal with the developer throughout the process. He also stated that in the circumstances, the company can only blame itself for the liquidation.
Currently, the Chinese real estate market continues to show a downward trend. The negative dynamic continues to be fixed, despite Beijing’s measures to curb sinking prices and boost demand, which is weak. Over the past year, the number of developers in the Asian country has decreased by 59%.
Gary Ng, senior economist at Natixis SA, says that the macroeconomic impact of the liquidation of Evergrande on the state of the real estate sector will be negligible. At the same time, the expert noted that this process will worsen the mood of investors who will be concerned about the rapid increase in the number of other pending cases.
As we have reported earlier, Real Estate Crisis to Stop Development of China’s Economy for Years.