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The debt restructuring of Hong Kong-listed Chinese real estate developer Evergrande Group has broken down. Hong Kong High Court Judge Chan Ching-fan ordered the liquidation today (29th).
Evergrande, with more than $300bn (£236.1bn) of debts, is the world's most indebted real estate developer, and the process of its liquidation is very complicated, how much money will the creditors get back in the end? Will China recognize the Hong Kong court's decision? Will the liquidation trigger a domino effect in China's real estate market? Reuters and Bloomberg have compiled the QA below.
WUHAN, CHINA - SEPTEMBER 24: (CHINA OUT) A general view of the Evergrande changqing community on September 24, 2021 in Wuhan, Hubei Province, China. In 2015, Evergrande real estate acquired four super large projects in Haikou, Wuhan and Huizhou, with a total construction area of nearly 4 million square meters and a total amount of 13.5 billion yuan. Evergrande, China's largest property developer, is facing a liquidity crisis with total debts of around $300 billion. The problems faced by the company could impact China’s economy, and the global economy at large.（Photo by Getty Images)
Why is Evergrande in debt?
According to Bloomberg, Evergrande's debt of US$333 billion comes from a long history of borrowing to drive its business, which made Evergrande a real estate giant in China, where it once led the country in terms of sales. However, when the Beijing authorities shifted to curbing the housing bubble, Evergrande was no longer able to "support its debt with debt," and it finally defaulted on some of the bonds in December 2021, and was unable to make its debt repayments. The debtors arrived in June 2022.
After the debtors went to the Hong Kong court in June 2022 to seek justice, the judge delayed the lawsuit several times to give Evergrande a chance to draw up a debt restructuring plan, but the difficulty of the plan and the fact that founder Hui Ka-yin was investigated for a crime in September last year prompted the judge to order the liquidation of the company today.
What are the liquidation procedures?
Reuters points out that when Evergrande Group enters liquidation, trading in all of its shares, along with those of its subsidiaries, will be suspended because the Hong Kong Stock Exchange requires listed companies to have a business structure that allows them to operate their business and assets adequately. The company's assets will be taken over by a liquidator appointed by a judge, who will be responsible for realizing those assets and paying off debts, as well as investigating corporate governance and reporting back to Hong Kong prosecutors if directors are found to be involved in suspected wrongdoing.
If the liquidators find that Evergrande is not insolvent, or that there are well-funded investors willing to intervene, the liquidators may propose a new debt restructuring plan. Evergrande's foreign debt holdings total US$23 billion (approximately NT$718.3 billion). Evergrande can appeal against the court's decision, but it will not affect the liquidation process.
On January 29, Evergrande Motor Company and Evergrande Real Estate Company made announcements on the Hong Kong Stock Exchange to the effect that China Evergrande Group, the controlling shareholder of the Company, was ordered by the High Court of Hong Kong to be wound up on January 29th. Save as disclosed above, there is no other inside information of the Company that needs to be announced. Trading in the Company's shares on the Stock Exchange was halted with effect from 10:19 a.m. on January 29th. Application has been made to the Stock Exchange for resumption of trading in the Company's shares with effect from 9:00 a.m. on January 30th."
How long will the liquidation take?
Hong Kong Sing Tao Daily quoted Wu Mi, Managing Director of Reorganization Services at Chi-Tung CPA Firm, as saying that most of Evergrande's assets are in China, so cross-border liquidation is more difficult, plus Evergrande's domestic entities have their own debts and creditors, and they need to deal with these creditors and debt problems before they can return valuable assets to the holding company's structure, and the entire liquidation process is expected to take more than five years.
How much can the debtors get back?
In September last year, Evergrande Group said that due to the fact that its founder, Hui Ka Yan, had been investigated for crimes, it was estimated that after the liquidation, the debtors could only recover less than 3% of the debt.
As a matter of fact, most of Evergrande's assets have been sold or seized by creditors, leaving only two subsidiaries listed in Hong Kong, "Evergrande Properties" and "Evergrande New Energy Vehicles". However, even if the liquidator tries to sell Evergrande's shares of these two companies, I am afraid that it would be difficult to find a buyer in the market, not to mention the fact that the market value of these two companies is only US$973 million now.
Can Debtors Liquidate Their Chinese Assets?
Guangzhou-based Evergrande Group owns many properties in China, but the liquidator's takeover of these properties is challenging and can take months or even years, as Guangzhou and Hong Kong do not recognize each other's liquidation orders, and many of the projects in China have either been taken over by local creditors or frozen by the courts, and some are even "negative assets" due to the downturn in China's housing prices.
What is Beijing's attitude?
This is the unanswered question in Evergrande's liquidation, whether Beijing will agree to the liquidation resolutions made by the Hong Kong courts to be enforced in other cities in China. Although Beijing has in the past agreed to recognize liquidation orders issued by Hong Kong courts in Shenzhen, Shanghai and Xiamen, it has been difficult to enforce such orders due to the opaque nature of China's legal system.
What is the impact of Evergrande's liquidation?
Consumer confidence in China's housing market is now so fragile that it can't afford to let the wind blow, so this is bound to be another big blow, and it could even spill over into related industries such as construction, cement and finance, while retail will also be affected by low consumer confidence, and eventually there could be more liquidated companies, all of which will affect China's economy.
According to experts cited by Bloomberg, the Hong Kong court's decision undoubtedly offsets Beijing's recent policy of boosting the housing market. Although housing prices are falling, consumers are worried about real estate developers going bust and are afraid to enter the market for fear of buying dilapidated properties, and Evergrande's liquidation has further dampened the public's willingness to buy homes. According to bankruptcy experts quoted by Reuters, Evergrande's projects and liabilities were too big, involving many authorities, and it was difficult for political factors not to get involved.
What will happen to Hui Ka Yan?
Hui Ka Yan is under investigation by the authorities and the result has not yet been announced. When the judge ordered the liquidation, he pointed out that the liquidation of the Evergrande Group would help him to know how much of the company's assets he still holds, and although the exact figure has yet to be calculated, it is certain that the US$42 billion (about NT$1.3 trillion) that he once held in his pocket is now in tatters.