Evergrande: Difficulties Ahead of the Failing Chinese Property Developer’s Court-Ordered Liquidation

An abandoned Evergrande commercial complex called Evergrande Palace in Beijing on Jan. 29, 2024. Greg Baker/AFP via Getty Images

Chinese property giant Evergrande was finally ordered to go into liquidation by Hong Kong’s High Court on Jan. 29. The trading of three Evergrande stocks were suspended immediately at the Stock Exchange of Hong Kong. Evergrande’s liquidation is expected to be long and difficult. Some analysts believe that the Chinese communist regime may intervene in Evergrande’s domestic debts.

Evergrande has been in a crisis with its creditors for the past two years and is the world’s most indebted real estate developer. The amount of money that creditors can recover will become an important example for the liquidation or debt restructuring of other defaulting developers in China.

The liquidation order issued by the Hong Kong court against Evergrande applies to the offshore assets of Evergrande Group, such as Evergrande Services and Evergrande NEV. However, as most of Evergrande’s assets are located in China, whether the liquidation process will be made difficult under the Chinese Communist Party (CCP) has become a focus for the international investment community.

S&P’s Expectation

American credit rating agency S&P Global Ratings said it expected the winding-up to highlight the arduous task of liquidating a large company, and reset expectations about recovery rates on defaulted Chinese speculative-grade bonds in the offshore market.

S&P said Evergrande’s entry into liquidation, with liabilities of $337 billion, is a milestone, but there are still a lot of unknowns in this case, as most of the issuer’s assets and liabilities are in mainland China, which is outside of Hong Kong’s jurisdiction.

“We assume offshore bondholders will get a few cents on the dollar once the liquidation plays out,” said Chang Li, S&P Global Ratings’ China corporates specialist. “They will likely yet have to wait years even for this thin payout.”

An S&P report on Jan. 31 shows that in offshore default cases of Chinese developers, the average cash recovery rate in court is 2.8 percent, and the recovery rate for the same issuer’s onshore default is 8.3 percent, S&P expects a similar disparity in the recovery rate in Evergrande’s liquidation.

In addition, an S&P research note suggested that this year China’s real estate market will show an L-shaped recovery and that national sales will drop again by 5 percent. Evergrande liquidation will not have too negative impact on the market, but home buyers will turn to buying from financially sound developers.

S&P also said that Evergrande’s domestic operating subsidiaries need to continue working on the guaranteed deliveries of hundreds of thousands of pre-sale homes, and if the parent company’s liquidation interferes with those tasks, then China’s real estate market could suffer even more.

Creditors’ Risks

Cai Zi, a financial columnist for The Epoch Times, said that Evergrande’s creditors are “well aware of the risks of liquidation, which means that they may encounter obstacles in realizing their assets.”

“This time, the [winding-up application] was filed in court by Top Shine Global, but there is a large number of creditors behind, many of them are institutional investors. They also know that even if Evergrande continues to operate as usual without liquidation, in the end, they will not be able to get back much and may be left with nothing.”

Mr. Cai suggested that the court ruling allowed the creditors to go through legal channels to send auditing and liquidation teams to examine Evergrande’s assets and find out those that can be sold, which is better than ending up with nothing.

Gary Ng, a senior economist at Natixis, said that since most of Evergrande’s assets are located in China, shareholders could be in a worse situation as there is uncertainty about how creditors will seize assets and the repayment rank to overseas bondholders.

Potential Intervention by CCP

Shi Shan, a senior writer and contributor to the Chinese language edition of The Epoch Times, said that most of Evergrande’s assets are in mainland China and that overseas buyers of Evergrande’s shares and bonds will lose a lot of money if the CCP does not proceed with liquidation.

“Evergrande will not be liquidated in mainland China because it is not just a real estate company,” he said. “It has a close relationship with the government, and its influence is too great.”

Mr. Shi explained that in China, all real estate developers must maintain intricate connections to the local government in order to expand their business, and they have various financial ties to the local government. Once liquidation proceeds, the local government’s debt will need to be audited, which will pose serious risks to the local government officials.

He further explained that Evergrande has a debt of $300 billion, and once liquidated, it will cause land and property prices in China to further plummet, which will affect the local government’s previous plans for land sales. On the other hand, there are still millions of people who have purchased pre-sale homes that have not been delivered. Their fate and their losses are still unpredictable.

“The situation in China will be very complicated, and, certainly China will not liquidate Evergrande very soon,” Mr. Shi said. “Overseas creditors who want to access Evergrande’s assets in mainland China will encounter the most difficulties, and those good assets will definitely be swallowed by Communist China’s state-owned enterprises first.”

Evergrande’s liquidation may accelerate the restructuring negotiations of other real estate companies’ overseas debts.

UBS said in a report released the day after the Hong Kong court ruling that the winding-up order applies to Evergrande’s offshore assets, such as Evergrande Services and Evergrande Vehicle, which are also listed in Hong Kong. However, the impact on mainland assets is limited. Hong Kong and mainland China courts have a mutual recognition agreement on insolvency and restructuring, which applies in some parts of mainland China, such as Shanghai, Shenzhen, and Xiamen. Therefore, the liquidation order may involve assets in those cities.

UBS believes that Evergrande’s liquidation order will accelerate the negotiation of other Chinese developers’ U.S. dollar debt restructuring. If the companies fail to put forward a concrete restructuring plan, bondholders may lose patience and file for liquidation. Some of the restructuring plans will involve debt for equity swaps, which will increase liquidity and lead to equity dilution. This will have a negative impact on the share prices of the defaulted developers. It is expected that there will be more asset sales by those developers to push forward the debt restructuring negotiations.

Reuters contributed to this report.