China Evergrande Group received a liquidation order from a Hong Kong court, setting off a daunting process to carve up the biggest casualty of a property crisis that’s upending the world’s second-largest economy.
The ruling on Monday from Hong Kong Judge Linda Chan is the latest twist in a saga that saw Evergrande amass more than US$300 billion ($402.41 billion) of liabilities during China’s debt-fueled property boom, before turning into the poster child of a market bust that shows few signs of ending. The builder was valued at just US$275 million on Monday before trading in its shares was halted, down more than 99% from its peak.
Evergrande’s collapse is by far the largest in a crisis that has dragged down China’s economic growth and led to a record spate of defaults by developers. The liquidation will be a test case of the legal reach of Hong Kong courts in China, where most of Evergrande’s assets reside. Any new management will also need to navigate asset sales in an industry lacking liquidity and confidence.
The winding-up will be closely watched by global investors, who have pulled billions of dollars from mainland China in part due to concerns over an uneven playing field for foreign capital as President Xi Jinping tightens the Communist Party’s grip on the economy. Policymakers may have to balance competing priorities as they try to shore up investor confidence while ensuring unfinished homes get built and the financial system remains resilient to the property industry’s woes.
“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.”
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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 smaller peers 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 claims available for holders of US$17 billion in Evergrande dollar bonds covered in its proposed restructuring plan.
Most of Evergrande’s dollar notes were indicated at about 1.5 cents on the dollar as of Friday, an indication that investors have low expectations for repayment, according to Bloomberg-compiled data.
In another hearing on Monday afternoon, Chan named Alvarez & Marsal Inc. — one of the largest restructuring consulting firms, whose past cases include Lehman Brothers Holdings Inc. — as the liquidator firm overseeing the process.
The judge appointed Eddie Middleton and Tiffany Wong, who are managing directors of Alvarez & Marsal, as joint liquidators overseeing the case. Wong has worked as the receiver for creditors who seized a Hong Kong building once known as the China Evergrande Centre.
“The company has made all efforts possible and is sorry about the winding-up order,” Evergrande Chief Executive Officer Shawn Siu said in a statement. “The company will ensure home deliveries and steadily promote normal operation of the group.” It will also communicate with the appointed 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 US$14.7 billion debt claims of other offshore liabilities, according to its restructuring document dated March.
“The company has not demonstrated that there is any useful purpose for the court to adjourn the petition,” Judge Chan wrote in her ruling. “There is no restructuring proposal, let alone a viable proposal which has the support of the requisite majorities of the creditors.”
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. More than 90% of the company’s assets are located in mainland China, according to a court filing.
Founder and Chairman Hui Ka Yan was also placed under police control in September on suspicion of committing crimes, which could complicate the proceedings.
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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. Country Garden Holdings Co., also a former top builder, is now the focus for creditors 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. Beijing has increasingly sought to put a floor to the crisis, rolling out ever more measures to revive home sales and provide liquidity to debt-laden developers.
“The market should focus on the good companies that have weathered through this worst-ever credit downcycle,” said Jenny Zeng, chief investment officer for Asia fixed income at Allianz Global Investors. “Evergrande’s weight no matter in the physical market or the capital market is negligible. We should focus on the survivors.”
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 provide more breathing room.
“We’ve been ready, willing and able for the entire process to reach a deal with the company,” said Fergus Saurin, a partner at law firm Kirkland & Ellis LLP, legal adviser to an ad-hoc group of creditors, outside the courtroom after the hearing. “There has been a history of last-minute engagement which has gone nowhere. And in the circumstances the company only has itself to blame for being wound up.”
In the end, the ad-hoc group, which had in several previous hearings supported the company in adjournments, took a different tack on Monday. John Scott, a legal representative for group, said he wasn’t instructed to take any action. Meanwhile, the original petitioner’s legal representative Leo Remedios said he wasn’t pushing for a winding-up in Monday’s hearing.
The company’s legal representative, José-Antonio Maurellet, tried to prove that progress had been made on restructuring plans. He mentioned a revised plan where the original China Evergrande Group scheme—which consisted of a class A that includes the ad hoc, as well as a called class C holdout group—would be split into two schemes to help finally win class C support. He said that the company aimed to ready new term sheets by March.
But the ad-hoc group found that attempt unacceptable. At the same time, a new party emerged in Judge Chan’s ruling on Monday. A creditor called Treasure Glory Global Ltd., which had a US$100 million on-lent loan under an agreement dated July 2021, issued a summon on Jan. 25 for substitution as a petitioner, according to the judgement. But Judge Chan didn’t hear this petition in Monday’s hearing.
In the broader backdrop to the courtroom drama, China’s property market has continued to slump even after the nation introduced a slew of new measures to stem sinking prices. A Bloomberg gauge of Chinese developers has dropped 59% in the past year.
“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.”
Evergrande’s winding-up petition case number is HCCW 220/2022.
