A Hong Kong court order to wind up developer China Evergrande Group sets in motion a complex, multiyear process that will test China’s faltering property market as well as cross-border insolvency arrangements between Hong Kong and Beijing.
The decision was made after seven hearings were held on a winding-up petition filed in June 2022 by creditor Top Shine Global. With no viable restructuring agreement in place, Justice Linda Chan said she did not see any grounds for further delays.
Evergrande has more than USD 300 billion in liabilities. Liquidators will seek to recover as much value as possible from the sale of assets. Investors will brace for the impact of the disposals on a property market already reeling from the impact of rampant speculation, excessive debt and the COVID-19 pandemic.
Here are five things to watch:
What assets will be sold?
Hong Kong’s High Court appointed consultancy Alvarez & Marsal (A&M) as the official liquidator on Monday. A&M’s first order of business will be to talk with Evergrande’s management about whether it has “any viable restructuring proposals,” said A&M’s Tiffany Wong, who will be overseeing the liquidation with her colleague Edward Middleton.
“Our priority is to see as much of the business as possible retained, restructured and remain operational,” Wong said.
Evergrande CEO Xiao En, also known as Siu Shawn, told Chinese publication 21 Caijing on Monday that the liquidation order will not affect the group’s onshore or offshore operations, and vowed that unfinished construction projects would be completed.
Some investors said they were unsure what would come next. “It’s not obvious what’s best for the company or the stakeholders,” said Benjamin Bennett, Hong Kong-based head of investment strategy and research for Legal & General Investment Management, which invests in China’s credit markets.
How long will the liquidation process take?
Given Evergrande’s size and complexity, its liquidation could take years. Karl Choi, head of greater China property research at Bank of America Securities, said resolving the debt issues of big distressed property developers will be “a very long and arduous process.”
Recoveries for holders of debt of different seniorities will vary. Lance Jiang, restructuring partner at law firm Ashurst, estimated that it would take two to three years for the liquidators to figure out such issues.
How will the Hong Kong ruling be enforced by mainland authorities?
The liquidation ruling was made by a Hong Kong court, but most of Evergrande’s assets are in mainland China, which has a different judicial system. How the order will be enforced remains unclear.
Under a cross-border recognition agreement reached in 2021, Hong Kong liquidators can seek mainland assistance in taking control of a developer’s onshore assets. However, the mechanism only applies to courts in three Chinese cities: Shanghai, Xiamen or Shenzhen. Mainland authorities also can refuse a request if they decide it “offends public order.”
So far, Chinese courts have recognized only one of five winding-up applications granted in Hong Kong courts under the arrangement.
What are the implications for other distressed Chinese developers?
Some insolvency practitioners are hoping the Evergrande case serves as a model for other distressed developers from mainland China facing liquidation petitions in Hong Kong.
“The fact that Evergrande has now been placed in liquidation sets a precedent for offshore creditors seeking court-ordered liquidation of Chinese property developers, which have more than $100 billion in debt scheduled to reach maturity this year,” said Brock Silvers, managing director at Kaiyuan Capital, a Hong Kong-based private equity investment firm.
However, the complexity of Evergrande’s problems has raised doubts about its value as a precedent. “The winding up of Evergrande enters uncharted waters,” said Kher Sheng Lee, a Hong Kong lawyer and managing director and co-head Asia Pacific at the Alternative Investment Management Association. “A liquidator may gain control of some offshore assets, but [the] onshore implications are unclear. This will be a complex, multiyear process with many open questions.”
What are the implications for financial markets?
The direct impact of the liquidation order was expected to be limited because the financial markets had already priced in the failure of Evergrande.
The company’s bonds have been trading far below par, and its equity has qualified as a “penny stock” since August. Following the court decision on Monday, Evergrande shares listed in Hong Kong fell more than 20% to HKD 0.16 (USD 0.02) before trading was suspended.
“We don’t think this will particularly be a driver in leading to a deterioration in sentiment,” Mary-Therese Barton, chief investment officer of fixed income at Pictet Asset Management, told reporters in Hong Kong on January 29.
She said Chinese bonds as an asset class will “without a doubt play a role” in investor portfolios, but stressed that there was ongoing diversification to other markets and sectors, including renewable energy and mining in India, consumer goods in Indonesia and gaming in Macao.