China Evergrande Ordered to Liquidate in Landmark Moment for Crisis-hit Sector

This aerial photo shows the Evergrande logo on residential buildings in Nanjing, in China's eastern Jiangsu province on December 4, 2023. (Photo by AFP) / China OUT

A Hong Kong court on Monday ordered the liquidation of property giant China Evergrande Group, dealing a fresh blow to confidence in the country's fragile property market as policymakers step up efforts to contain a deepening crisis.
Justice Linda Chan decided to liquidate the world's most indebted developer, with more than $300 billion of total liabilities, after noting Evergrande had been unable to offer a concrete restructuring plan more than two years after defaulting on its offshore debt and following several court hearings, Reuters reported.
"It is time for the court to say enough is enough," Chan said in court on Monday.
The decision sets the stage for what is expected to be a drawn-out and complicated process with potential political considerations as investors watch whether the Chinese courts will recognise Hong Kong's ruling, given the many authorities involved. Offshore investors will be focused on how Chinese authorities treat foreign creditors when a company fails.
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 its chairman, Hui Ka Yan, is under investigation for suspected crimes.
Evergrande, which has $240 billion of assets, sent a struggling property sector into a tailspin and dealt a blow to the economy when it defaulted on its debt in 2021. The liquidation ruling creates further uncertainty for China's already fragile capital and property markets.
Evergrande chief executive Siu Shawn told Chinese media the company will ensure home building projects will still be delivered despite the liquidation order. The ruling would not affect the operations of Evergrande's onshore and offshore units, he added.
"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, managing director of Alvarez & Marsal after the appointment.
Edward Middleton, also managing director with Alvarez & Marsal, said the firm would immediately head to Evergrande's headquarters.
"It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande's daily operations even harder," said Gary Ng, senior economist at Natixis. "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 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.
Both the Hong-Kong listed subsidiaries have applied for resumption of trading in their shares on Tuesday, they said in separate statements.
COMPLICATED PROCESS
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 hit to investor confidence could further undermine policymakers' efforts to rejuvenate growth.
Evergrande applied for another adjournment on Monday as its lawyer said it had made "some progress" on the restructuring proposal. As part of the latest offer, the developer proposed creditors swap their debts into all the shares the company holds in its two Hong Kong units, compared to stakes of about 30% in the subsidiaries ahead of the last hearing in December.
Evergrande's lawyer argued liquidation could harm the operations of the company, and its property management and electric vehicle units, which would in turn hurt the group's ability to repay all creditors.
Evergrande had been working on a $23 billion debt revamp plan with a group of creditors known as the ad hoc bondholder group for almost two years.
A court document on Monday showed Evergrande's key offshore assets also include an unsecured interest-free loan of HK$2.1 billion ($268.78 million) to a previous unit, China Ruyi , positions in the Greater Bay Area Homeland Investment and its fund with a total book value of HK$1.6 billion, bank balances of HK$3 million and receivables of 131.2 billion yuan ($18.28 billion) owed by its subsidiaries.
Evergrande could appeal the liquidation order, but the liquidation process would proceed pending the outcome of the appeal.
"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 its chairman Hui Ka Yan were being investigated by the authorities for unspecified crimes, creditors now expect a recovery rate of less than 3%.
Evergrande's dollar bonds were bid at around 1-1.5 cents on the dollar last week.
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 - a different jurisdiction from Hong Kong.
The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honor 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 current debt crisis unfolded in mid-2021.