China Evergrande Group, a significant player in the nation's real estate sector, has been handed a liquidation order by a Hong Kong court. This development marks the initiation of a challenging process to dismantle one of the largest casualties of China's prolonged and widespread property debt crisis. The aftermath of this liquidation will see the company being overseen by provisional liquidators who will address critical issues, including the control exercised by the founder and Chairman, Hui Ka Yan.
This legal decision unfolded in the city’s High Court on a Monday morning, leading to the suspension of trading in Evergrande shares after a substantial 21% decline, resulting in a market value plummeting to just HK$2.15 billion ($275 million).
With liabilities amounting to a staggering 2.39 trillion yuan ($333 billion), Evergrande solidifies its status as the most prominent symbol of China’s real estate crisis. This crisis has not only curtailed economic growth but has also dealt a blow to consumer confidence.
The company’s failure to reach an agreement with creditors, even after protracted negotiations, led to the founder being placed under police control in September on suspicion of committing crimes as Bloomberg reports.
The liquidation order is deemed a pivotal moment in the restructuring of China’s property sector. Observers highlight that how the authorities draw the line between offshore and onshore stakeholders will be a critical aspect for investors to monitor closely.
Most of Evergrande’s dollar-denominated notes were trading at around a mere 1.5 cents on the dollar as of the previous Friday, underscoring the severity of the financial distress.
While the creditors did not explicitly seek a wind-up order, Judge Linda Chan pointed out the lack of progress, stating that the company had made promises but failed to deliver on them. She, however, mentioned that even after a wind-up, there remains the possibility for the company to propose a scheme of arrangement.
Evergrande, once the country’s largest builder by sales, has faced a tumultuous journey since its initial default on a dollar bond in December 2021. The petition for liquidation was filed in June 2022 by Top Shine Global Limited of Intershore Consult (Samoa) Ltd., a strategic investor in the homebuilder’s online sales platform.
Judge Chan, presiding over a series of developer hearings, is set to conduct a hearing on a potential regulating order. Such orders imply that the court would regulate the winding-up process, potentially appointing a liquidator.
Despite Evergrande proposing several restructuring plans since its default, the process has encountered numerous setbacks, including the last-minute cancellation of creditor meetings in late September.
The company put forth its latest restructuring plan in January, intending to present new term sheets by March. However, this effort failed to secure more breathing room for Evergrande. Even with the wind-up order, the liquidator is anticipated to encounter challenges in dealing with Chinese developers, given that most Evergrande projects are operated by local units that might be challenging for an offshore liquidator to seize.
Meanwhile, construction activities, housing delivery, and other operations in mainland China are expected to persist as the liquidation process unfolds.
The property market in China continues to face challenges, with prices continuing to decline despite the introduction of various measures aimed at stabilizing prices and stimulating demand.
The fate of Evergrande serves as a stark reminder of the far-reaching consequences of the real estate crisis on the broader economy and investor sentiment, be careful, traders!
29.01.2024
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