Restructure or liquidate? Deadline looms for China’s Evergrande

In April, a group of international investors holding billions of dollars of Evergrande bonds backed a restructuring of the stricken Chinese property developer. Now, they are braced for a court hearing on Monday that could lead to the company’s liquidation.

It has been a tortuous road for overseas creditors of Evergrande, whose default in 2021 triggered a China-wide property crisis that continues to rock the world’s second-largest economy.

Monday’s hearing at Hong Kong’s High Court could prove a key moment in deciding what value can be salvaged from Evergrande’s bonds. It could also be an important test of the treatment of international investors when a mainland Chinese company fails.

The Hong Kong winding-up lawsuit, brought by offshore investor Top Shine Global last year, alleges Evergrande has failed to honour claims of HK$863mn ($110mn). At a previous hearing in October, Judge Linda Chan gave Evergrande “one last opportunity” to formulate a new restructuring proposal, warning that otherwise it was “very likely” to be subject to a winding-up order.

Bondholders’ advisers have said this order is likely to lead to the group’s “uncontrolled collapse” with a “catastrophic effect” on other developers in China and the ability of Chinese companies generally to raise money in international capital markets.

“If this goes to liquidation, the remaining options are likely to be far less palatable” to overseas investors, said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong. Evergrande did not respond to requests for comment.

The international creditors had hoped for better in April when they backed Evergrande’s restructuring plan.

The deal offered them various instruments depending on their holdings, including new notes with a 10- to 12-year maturity issued by the company and bonds that could be exchanged for shares in its Hong Kong-listed subsidiaries.

But in September, Evergrande cast doubt on the plan, saying it could not issue new notes because its mainland business, Hengda Real Estate, was “being investigated”. Days later the group said its chair, Hui Ka Yan — once Asia’s richest man — had been placed under “mandatory measures” on suspicion of involvement in unspecified “crimes”.

At October’s court hearing, Evergrande’s lawyer said it would look into “monetising” shares in two of its Hong Kong-listed subsidiaries, electric vehicle company Evergrande New Energy Vehicle Group and Evergrande Property Services Group.

It has since offered creditors a 30 per cent stake in each of the two units, and a nearly 18 per cent stake in Evergrande itself, a person with direct knowledge of the matter said. However, they added, it was not clear whether creditors would accept such a deal.

The combined market value of the two units is about $1bn against $30bn in total international bondholder claims based on a Bloomberg estimate.

In a blow to creditors ahead of October’s hearing, Dubai-based technology company NWTN said it was suspending a deal to invest $500mn in the electric vehicle unit, which was developed as part of Evergrande’s expansion out of the property sector before its default.

In April 2021 the electric vehicle company’s market value was almost $87bn — more than titans of the car industry such as Ford — despite never having produced a single vehicle.

Originally a healthcare company that was renamed in 2019, it raised funds from its parent and investors including Sequoia China — now known as HongShan — Chinese internet giant Tencent, Jack Ma-backed private equity firm Yunfeng Capital and ride-hailing group Didi. Nearly three years later, it is worth just over $400mn. As of May 2023 the EV unit said it had delivered more than 1,000 units of its flagship model since its launch last year.

The property services unit said this week it was suing its parent company to recover deposit certificate pledge guarantees for just under Rmb2bn ($280mn). A person close to that lawsuit said it was a sign the unit’s executives expected the parent company to be liquidated and were trying to protect their own interests.

Evergrande’s dollar bonds are trading at deeply distressed levels. One bond maturing in 2025, on which Evergrande has already defaulted, has fallen to less than two cents on the dollar.

If the Hong Kong court orders Evergrande to be wound up, bondholders’ attempts to salvage some returns would enter a new and perhaps even less predictable phase.

A liquidator could try to take control of Evergrande’s Cayman Islands holding company and its complex web of subsidiaries, including the property services and EV arms, a Hong Kong-based restructuring lawyer not involved in the case said.

In theory the liquidator could try to seize control of some Evergrande assets in mainland China under a 2021 mutual recognition agreement between Beijing and Hong Kong.

In practice, some lawyers doubt this would succeed. It is not clear mainland courts would accept a Hong Kong judge’s winding-up order, they said, and the onshore units would likely have to repay onshore creditors first.

“Even if you got lucky and found a Shenzhen judge, for example, to recognise your power over some assets in Guangdong somewhere, when it comes to enforcement, it’s not a level playing ground,” said a second Hong Kong lawyer who specialises in restructuring and insolvency.

“I don’t think anyone going in as a liquidator of Evergrande is going to be holding too much hope of making a recovery in mainland China.”

For years the offshore bondholders reaped high returns from their exposure to one of China’s biggest developers. Last month a lawyer for some bondholders said in court that in the event of a liquidation, they might expect to receive less than three cents on the dollar.

The outlook could be even worse. The process could take a decade or more, the second Hong Kong lawyer said, adding: “They may be looking at zero recovery.” —News Desk