Hong Kong court orders liquidation of Evergrande
A Hong Kong court on Monday ordered the liquidation of property giant China Evergrande Group, a move likely to send ripples through China’s crumbling financial markets as policymakers scramble to contain a deepening crisis.
Judge Linda Chan decided to liquidate the world’s most indebted developer, with more than $300bn of total liabilities, after noting Evergrande has been unable to offer a concrete restructuring plan more than two years after defaulting on a bond repayment and after several court hearings.
“It is time for the court to say enough is enough,” Chan said.
Evergrande CEO Siu Shawn said the company will ensure home-building projects will be delivered despite the liquidation order. He said the order will not affect operations of Evergrande’s onshore and offshore units.
The decision sets the stage for what is expected to be a drawn-out and complicated process with potential political considerations, given the many authorities involved.
Offshore investors will be focused on how Chinese authorities treat foreign creditors when a company fails.
“It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande’s daily operations even harder,” Natixis economist Gary Ng said. “As most of Evergrande’s assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders, and the situation can be even worse for shareholders.”
Evergrande’s shares were trading down as much as 20% before the hearing. Trading was halted in China Evergrande and its listed subsidiaries China Evergrande New Energy Vehicle Group and Evergrande Property Services after the verdict.
Chan appointed Alvarez & Marsal as the liquidator, saying an appointment would be in the interests of all creditors because it could take charge of a new restructuring plan for Evergrande at a time when chair Hui Ka Yan is under investigation for suspected crimes.
“Our priority is to see as much of the business as possible retained, restructured and remain operational. We will pursue a structured approach to preserve and return value to the creditors and other stakeholders,” said Tiffany Wong, MD of Alvarez & Marsal.
Evergrande, which has $240bn in assets, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021. The liquidation ruling is likely to jolt fragile Chinese capital and property markets.
Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows, so any fresh jolt to investor confidence could further undermine policymakers’ efforts to rejuvenate growth.
Evergrande had been working on a $23bn debt revamp plan with a group of creditors known as the ad hoc bondholder group for almost two years.
“We’re not surprised by the outcome and it’s a product of the company failing to engage with the ad hoc group,” said Fergus Saurin, a Kirkland & Ellis partner who had advised the offshore bondholders. “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.”
Evergrande cited a Deloitte analysis during a Hong Kong court hearing in July that estimated a recovery rate of 3.4% if the developer were liquidated. After Evergrande said in September its flagship unit and Hui were being investigated by the authorities for unspecified crimes, creditors now expect a recovery rate of less than 3%.
The ruling is expected to have little impact on the company’s operations, including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China, which is a different jurisdiction from Hong Kong.
The liquidation petition was filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao. It said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.
Before Monday, at least three Chinese developers have been ordered by a Hong Kong court to liquidate since the debt crisis unfolded in mid-2021.