Author: Claire Jim and Scott Murdock
HONG KONG (Reuters) – A Hong Kong court on Monday ordered the liquidation of China Evergrande, the world’s most indebted developer.
The move could have an impact on China’s already fragile capital and real estate markets. The process can be complex given the numerous authorities involved, and there may be potential political considerations.
What will happen after the court orders Evergrande to be liquidated?
Once a liquidation order is issued, a provisional liquidator will be appointed and then a formal liquidator will be appointed to take over and prepare the developer’s assets for sale to repay debts.
If liquidators determine the company has enough assets or white knight investors emerge, they could propose a new debt restructuring to overseas creditors who hold Evergrande’s $23 billion in debt. They will also investigate the company’s affairs and can refer any directors suspected of wrongdoing to Hong Kong prosecutors.
Evergrande can appeal against the liquidation order, but the liquidation process will continue during the appeal period.
After the liquidation order, the shares of Evergrande and its listed subsidiaries were suspended from trading. Listing rules require companies to have adequate business structures and asset values.
How much debt can a creditor collect? What are the main challenges?
Evergrande cited Deloitte’s analysis at a Hong Kong court hearing in July, predicting a recovery rate of 3.4% if the developer was liquidated.
However, creditors now expect recovery rates to be below 3% after Evergrande said in September that its flagship unit and its chairman Xu Jiayin were under investigation by authorities for alleged crimes.
Evergrande’s dollar bonds were quoted at about one cent on Friday.
Most of Evergrande’s assets have been sold or seized by creditors, leaving only two Hong Kong-listed subsidiaries, Evergrande Property Services Group and Evergrande New Energy Vehicle Group, whose combined market value had fallen to 9.73 as of Friday. One hundred million U.S. dollars.
Liquidators could sell Evergrande’s holdings in both units, although it would be difficult to find a buyer.
After liquidation, the liquidator can take control of Evergrande’s mainland Chinese subsidiaries by replacing the legal representatives of these subsidiaries one by one, a process that may take months or even years.
Bankruptcy experts said changing representatives for the liquidator would be a challenge because Guangzhou, where Evergrande is headquartered, is not one of the three Chinese cities that mutually recognize liquidation orders with Hong Kong.
Even if liquidators want to take over units with onshore projects, many of them have already been taken over by creditors, frozen by the court, have almost no value, or even become negative equity due to falling housing prices.
What impact will the liquidation have on China’s real estate market?
While the liquidation of the $240 billion developer will send shockwaves through already fragile capital markets, experts say it won’t provide a blueprint for how liquidations might unfold for other troubled developers.
Given the size of Evergrande’s project and debt, the process will involve many authorities and political considerations.
Completing ongoing house building projects will be a top priority for companies, industry and governments.
(Reporting by Clare Jim in Hong Kong and Scott Murdoch in Sydney; Additional reporting by Kane Wu; Editing by Lincoln Feast)