Huge Chinese developer heads to liquidation in milestone for property crisis

China Evergrande Group received a liquidation order from a Hong Kong court, setting off what’s likely to be a daunting process to carve up one of the biggest victims of a years-long and nationwide property debt crisis.

A wind-up will end up in the company being managed by provisional liquidators and addressing issues, including control by founder and Chairman Hui Ka Yan, Judge Linda Chan said in the city’s High Court on Monday morning. Trading in Evergrande shares was suspended after the stock tumbled 21 per cent, giving it a market value of just HK$2.15 billion (€253 million).

The ruling cements the home builder – carrying 2.39 trillion yuan (€307 billion) of liabilities – as the most prominent symbol so far of China’s real estate crisis, which has crimped economic growth and hurt consumer confidence. The developer had failed to reach an agreement with creditors even after years of negotiations, with Hui placed under police control in September on suspicion of committing crimes.

The order “is a milestone for the restructuring of China’s property sector, and how the authorities draw the line between offshore and onshore stakeholders will be a crucial issue to watch for investors,” said Homin Lee, an Asia macro strategist at Lombard Odier Singapore.

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Most of Evergrande’s bonds demoniminated in US dollars traded at about 1.5 1.5 cents on the dollar as of last Friday, according to Bloomberg-compiled data.

While creditors weren’t seeking a wind-up order, Judge Chan noted the lack of progress. “The company said it will do one, two, three,” she said. “None of that has been done.”

Still, “even after a wind-up, it’s still possible for the company to put forward a scheme of arrangement,” said Judge Chan.

Evergrande, which first defaulted on a dollar bond in December 2021, was for a time in the last decade the country’s largest builder by sales. The petition for liquidation was filed in June 2022 by Top Shine Global Limited of Intershore Consult (Samoa) Ltd., which was a strategic investor in the home builder’s online sales platform.

Judge Chan, who has presided over a string of developer hearings, will conduct a hearing on a potential regulating order on Monday, according to information on the city’s judiciary website. Such orders mean that the court would regulate the winding-up process, potentially including appointing a liquidator.

Since its default in 2021, Evergrande has proposed several restructuring plans. But the process has run into various troubles. It scrapped its creditor meetings at the last minute in late September, saying the latest plans requires reassessment.

The company proposed its last restructuring plan in January and aims to present new term sheets by March, according to participants in the Monday hearing that included legal representatives from Evergrande and its ad hoc bondholder group. But that effort failed to buy Evergrande more breathing room.

Even with the wind-up order, the liquidator is likely to face a tricky process in dealing with Chinese developers. Most Evergrande projects are operated by local units, which could be hard for the offshore liquidator to seize. And construction work, housing delivery and other activities in mainland China likely will continue while the process unfolds.

The property market has continued to sag even as China introduced a slew of new measures to stem sinking prices and sluggish demand. – Bloomberg