Stock - Evergrande
The China property market will feel the reverberations from the latest episode in the Evergrande saga. Image Credit: Reuters

China Evergrande Group received a liquidation order from a Hong Kong court, setting off what’s likely to be a daunting process to carve up one of the biggest victims of a years-long and nationwide property debt crisis.

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A wind-up will end up in the company being managed by provisional liquidators and addressing issues, including control by founder and Chairman Hui Ka Yan, Judge Linda Chan said in the city’s High Court on Monday morning. Trading in Evergrande shares was suspended after the stock tumbled 21 per cent, giving it a market value of just $275 million.

The ruling cements the homebuilder “- carrying $333 billion of liabilities “- as the most prominent symbol of a real estate crisis that led to slower economic growth and a slew of defaults. The liquidation will be a test case of the legal reach of Hong Kong courts in China, where most of Evergrande’s assets reside, with any new management also needing to navigate asset sales in an industry lacking liquidity and confidence.

“The market will pay close attention to what the liquidators can do after being appointed, especially whether they can achieve recognition from any of the three designated PRC courts” under a 2021 arrangement between China and Hong Kong, said Lance Jiang, restructuring partner at law firm Ashurst. “The liquidators will have very limited powers of enforcement over onshore assets in mainland China if they cannot get such recognition.”

While Hong Kong’s courts have issued at least three wind-up orders for other Chinese developers since the crisis began in 2021, none comes close to Evergrande in complexity, asset size, and the number of stakeholders. There are also few signs that the liquidation of Jiayuan International Group and Yango Justice International Ltd., a unit of Yango Group Co., are moving forward much.

Hong Kong’s insolvency proceedings have limited recognition in China, whose courts may also appoint administrators in their own jurisdictions. That leaves open the question of the claims of the $17 billion of Evergrande’s dollar bond holders covered in its proposed restructuring plan.

Dollar bonds 

Most of Evergrande’s dollar notes traded at around 1.5 cents on the dollar as of last Friday, an indication that investors have little expectations on repayment, according to Bloomberg-compiled data.

“The company has made all efforts possible and is sorry about the winding-up order,” Evergrande Chief Executive Officer Shawn Siu said in the statement. “The company will ensure home deliveries and steadily promote normal operation of the group.” It will also communicate with the liquidator, he said.

The petition for liquidation was filed in June 2022 by Top Shine Global Limited of Intershore Consult (Samoa) Ltd., which was a strategic investor in the homebuilder’s online sales platform. Evergrande’s offshore restructuring plan also covers $14.7 billion debt claims of other offshore liabilities, according to its restructuring document dated March.

While creditors weren’t immediately seeking a wind-up order, Chan noted the lack of progress. “The company said it will do one, two, three,” she said. “None of that has been done.” Still, “even after a wind-up, it’s still possible for the company to put forward a scheme of arrangement,” Chan said.

Chan, who has presided over a string of developer hearings, will conduct a hearing on a potential regulating order at 2:30pm Monday, according to information on the city’s judiciary website. Such orders mean that the court would regulate the winding-up process, potentially including appointing a liquidator.

Defaulting on payments

When Evergrande, which for a time in the last decade was the country’s largest builder by sales, first defaulted on a dollar bond in December 2021, it sent a shock wave through China’s markets with investors fearing contagion. Beijing has sought to put a floor to the real estate crisis, rolling out measures to revive home sales and provide liquidity to debt-laden developers.

Country Garden Holdings Co., also a former top builder, is now the focus for investors after its default in October. While Evergrande failed to reach agreement with its creditors, there’s been a glimmer of hope for investors with the restructuring agreement for Sunac China Holdings Ltd. In November.

Evergrande proposed its last restructuring plan in January and aims to present new term sheets by March, according to participants in the Monday hearing that included legal representatives from Evergrande and its ad hoc bondholder group. That effort failed to buy Evergrande more breathing room.

Any court-appointed liquidator is likely to face a tricky process. Most Evergrande projects are operated by local units, which could be hard for the offshore liquidator to seize. Hui was also placed under police control in September on suspicion of committing crimes, which could complicate the proceedings.

The property market has continued to even as China introduced a slew of new measures to stem sinking prices and sluggish demand.

“The macroeconomic impact should be limited as the liquidation itself is unlikely to exert more pressure on the battered property sector,” said Gary Ng, senior economist at Natixis SA. “However, it will worsen sentiment as investors will be worried that there is a snowball effect on other pending cases.”