On Monday, China Evergrande Group, once China’s largest property developer, received a liquidation order from a Hong Kong court. It is the biggest casualty of China’s real estate crisis.
Evergrande Group was valued at just $275 million on Monday before trading in its shares was halted, down more than 99% from its peak. Evergrande defaulted on its bonds in December 2021, triggering protracted negotiations with creditors that failed to save the company. Overall, Evergrande Group has more than $300 billion in liabilities set against total assets of $242 billion, for a net value on paper of $142 billion.
Hong Kong’s insolvency proceedings have limited recognition in mainland China, where courts may appoint administrators in their own jurisdictions. That complicates the claims available for holders of $17 billion in Evergrande dollar bonds covered in its proposed restructuring plan. According to Bloomberg-compiled data, Evergrande’s dollar notes were trading at about 1.5 cents on the dollar as of last Friday, showing investors have low expectations for repayment.
The reach of a Hong Kong-appointed liquidator into Evergrande’s assets is expected to be limited, as only courts in Shanghai, Shenzhen, and Xiamen will recognize insolvency proceedings in Hong Kong due to a 2021 deal that covers reorganization in the mainland as well as restructuring in Hong Kong. Evergrande’s property development business includes more than 1,300 projects across 280 cities. An interim report from the company showed the property under development was valued at 1.09 trillion yuan ($152 billion) as of June of last year.
The recent stock market slump in China has shrunk the value of Evergrande’s stakes in its subsidiaries, China Evergrande New Energy Vehicle Group Ltd and Evergrande Property Services Group Ltd. With the plunge in their values, creditors are at risk of taking hefty losses in a bid to sell assets and recover the debt behind them. Creditors had sought to stave off the liquidation order through more than two years of negotiations with Evergrande, but those negotiations failed to yield substantial progress. Chinese law firm Bohe & Hansen said, “The eventual winding-up of Evergrande is a lose-lose situation for the company and its creditors.”
Almost all of Evergrande’s assets are in mainland China, presenting legal hurdles for non-Chinese administrators. How much of Evergrande’s properties can be reserved for offshore creditors remains uncertain. According to accounting firm Grant Thornton, “Liquidation of this scale will often take several years to complete, and this time frame could be extended to a decade or more if the liquidators identify any legal actions against service providers of the company that they wish to pursue in their efforts to recover money from creditors.”
The Evergrande debacle is an overall bearish factor for Chinese stocks as global investors get a tough lesson on the opaque and haphazard laws governing investments in Chinese assets.
More Stock Market News from Barchart
- Stocks Struggle as Bond Yields Rise on Strong JOLTS Job Openings Report
- 3 Best Agriculture ETFs to Buy for 2024
- Markets Today: Stocks Slip Ahead of Big Tech Earnings and FOMC Meeting
- Earnings Advantage: Selling an AMD Put Option Before Their Earnings Announcement
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
/A%20concept%20image%20of%20a%20flying%20car_%20Image%20by%20Phonlamai%20Photo%20via%20Shutterstock_.jpg)
/A%20concept%20image%20of%20space_%20Image%20by%20Canities%20via%20Shutterstock_.jpg)
/Oracle%20Corp_%20office%20logo-by%20Mesut%20Dogan%20via%20iStock.jpg)