China Evergrande ordered to liquidate by Hong Kong court
Published 29 Jan 2024, 17:21
China Evergrande Group was ordered to be wound up by the Hong Kong High Court on Monday after the world's most indebted property developer failed to come up with a concrete restructuring plan before the hearing.
The court also appointed Tiffany Wong and Eddie Simon Middleton, both from Alvarez & Marsal, as joint liquidators.
Justice Linda Chan said the liquidation order is appropriate because of the company's lack of progress on providing a viable plan. She said the previous adjournment of the hearing was to give the company more time to further revise the restructuring plan, negotiate with creditors and seek legal opinions, but "none of that has happened".
During the hearing, lawyers representing the developer proposed a new plan allowing Class C creditors to have their onshore claims recognised in a Hong Kong scheme of arrangement. But the judge said the court might not sanction the proposal as it would treat Class C and Class A creditors differently.
Evergrande, with total liabilities of more than US$300bn, announced an initial restructuring plan last March for its US$22.7bn of offshore debt, which split offshore creditors into two categories, Class A and Class C. That plan was put on hold after the company failed to issue new debt and subsequently failed to come up with another concrete plan that had the support of creditors.
In a filing that detailed the reasons for the order, the judge said the interests of creditors would be better protected if the company is wound up so that independent liquidators can take control of the company, secure the assets and formulate a restructuring proposal. She said that has the additional advantage of taking the company out of the control of Hui Ka Yan, Evergrande's chairman, who has been under investigation since last September, which created regulatory hurdles that prevented the company from issuing new debt.
A spokesperson from Kirkland & Ellis, which represented an ad hoc group of Evergrande bondholders, said outside the court on Monday morning that the outcome was not a surprise after the company failed to engage with creditors.
A&M said in a press release that the winding-up order has been made to the parent company only and does not have a direct impact on the operations of its subsidiaries, especially those in mainland China.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said she does not think the offshore liquidation would push the company to be liquidated onshore as well.
"So I don’t think the onshore problem is resolved, let alone the fact there are a lot of account receivables unpaid – providers of goods and services to Evergrande – and I think the rippling effect on defaults, SMEs included, is not something the China will take on. I think China will simply not allow the HK courts to seize the assets onshore," she said.
"The wind up order was expected but still represents a blow to China’s real estate sector and general investment environment," said Brock Silvers, chief investment officer at asset manager Kaiyuan Capital. "China’s developers have more than US$100bn in maturing obligations this year while the sector’s business model remains busted. Those creditors have for sure noted today’s liquidation order, which does nothing to help China as it tries to fend off a crisis of confidence in its financial markets."
She also pointed out that the liquidation will make US dollar funding costs more expensive for Chinese companies which are seeking IPO or bond deals as foreign investors will start to question the underlying assets and collateral.
Leonard Law, a senior credit analyst from Lucror Analytics, saw a lot of uncertainties about the liquidation process because of Evergrande's large size and the conflicting interests of various onshore stakeholders.
"It will be a very long drawn-out process," he said. "In any case, the liquidation order is a reflection that Evergrande’s offshore debt restructuring plans have failed. It is doubtful whether offshore creditors will be able to recover any value from the liquidation process."
Trading in the shares of Evergrande and Hong Kong-listed subsidiaries Evergrande Property Services Group and China Evergrande New Energy Vehicle Group was halted following the winding-up order.
Additional reporting by Sara Velezmoro