©Reuters. FILE PHOTO: An exit sign is seen in front of residential buildings at an Evergrande residential complex in Beijing, China, September 27, 2023. REUTERS/Florence LO/File Photo
(Reuters) – A Hong Kong court on Monday ordered the liquidation of China Evergrande (HK:) Group, a move that could send ripples through China’s ailing financial markets as politicians race to contain the deepening crisis.
MARKET REACTION:
Trading in shares of China Evergrande, China Evergrande New Energy Vehicle Group and Evergrande Property Services were halted. The benchmark rose 1.2%.
COMMENT:
LANCE JIANG, RENOVATION PARTNER, ASHURST
“The market will pay close attention to what liquidators can do after being appointed, particularly if they manage to gain recognition from one of the three PRC courts designated under the 2021 Agreement on Cooperation on Cross-Border Insolvency Cases between Mainland China and Hong Kong SAR Liquidators will have very limited enforcement powers over onshore assets in Mainland China if they fail to obtain such recognition.
“If Evergrande is placed into bankruptcy administration by a PRC court, international investors will need to see whether the PRC court-appointed administrator can work with Hong Kong court-appointed liquidators to achieve a transparent, cooperative and fair restructuring or liquidation of Evergrande.”
CHRIS BEDDOR, DEPUTY DIRECTOR OF CHINA RESEARCH, GAVEKAL DRAGONOMICS, HONG KONG
“Evergrande is a unique case in many respects, but it highlights that the overall situation for real estate developers has not improved significantly in recent months. In fact, the sector continues to worsen in some aspects, such as sales revenues.
“There is also a fairly clear transmission mechanism for understanding how this affects the mainland market: homebuyer sentiment. Potential homebuyers are still deeply reluctant to buy pre-sold homes from distressed developers, and we see this reflected in the data.
“This certainly won’t help the sentiment problem.”
FERN WANG, SENIOR RESEARCHER, KT (NYSE:) CAPITAL GROUP, HONG KONG
“The ruling is expected to have only limited short-term implications for investor confidence, given that it has been a long time in the making. Evergrande’s liquidation ruling should not prevent other troubled property developers from reaching an agreement with their creditors. Promoters just need to demonstrate that they are willing to work with creditors to come up with a fair and workable restructuring plan. Sunac, another major troubled builder, managed to reach a restructuring plan with its creditors in the end last year, proving that it is something feasible.
“Investors should examine each developer on a case-by-case basis. Evergrande’s situation is more complicated than other developers as its founder Hui Ka Yan is under arrest and its main China subsidiary Hengda Real Estate Group is under investigation. The investigation has prevented the company from issuing new debt and limited its ability to reach an agreement with creditors, and it was reported that Hui was likely to divorce his wife due to separation of assets, raising doubts about his willingness to support the group.
“Recovery hopes are bleak, given the company’s heavy debt and the subordinate, often structural, position of offshore creditors. Evergrande’s bonds currently trade at less than 2 cents on the dollar.”
DEREK LAI, GLOBAL SOLVENCY LEADER, DELOITTE
“The liquidator of Hong Kong holding companies as a shareholder may attempt to take control of the onshore assets by changing the legal representatives of the affected onshore subsidiaries, but this will usually take some time to do, even if it is possible.
“The Evergrande case is much more complicated. Even though the group owns many assets in mainland China, it is not easy for offshore liquidators to seize them directly.
“In the event of liquidation, the biggest risk for creditors is that they may not have a high recovery percentage of their debts compared to their total debts.”
WANG BO, DIRECTOR, INVESTMENT DIRECTOR, JURUN CAPITAL, SHANGHAI
“This Evergrande thing at this point has the potential to go both ways. The first is whether an offshore liquidation is equivalent to a domestic consolidated bankruptcy. Even if it amounts to a judicial bankruptcy, I think it’s difficult to say whether this load of work can be replicated. On the other hand, the most nervous real estate developers at the moment will certainly be the least qualified.”
MARK DONG, CO-FOUNDER AND GENERAL MANAGER, MINORITY WEALTH MANAGEMENT, HONG KONG
“The liquidation was expected and now it is confirmed. It was already a given.”
CAI HONGFEI, REAL ESTATE ANALYST, CENTRAL WEALTH SECURITIES
“I think the impact is limited. Evergrande no longer has the ability to operate. It can’t solve its own problem, so it has no choice but to liquidate. And the boss has been arrested. Evergrande is a special case.”
NICHOLAS CHEN, ANALYST, CREDITSIGHTS, SINGAPORE
“For other struggling Chinese developers, overall market sentiment would undoubtedly be affected, although each company’s restructuring depends on myriad factors…
“However, the cases of Evergrande and Jiayuan, which also received a liquidation order in May last year, highlight that defaulting developers would have to provide a concrete restructuring plan to the Hong Kong courts and have no perpetual runway to to do it.
“In terms of the regulatory stance, we expect the increasingly supportive political environment to provide some breathing space to the cash-strapped real estate sector, although the extent of the breathing space for each builder is likely to vary. We expect the support regulatory remains bifurcated and unbalanced towards the strongest (mostly state-related) developers.”
REDMOND WONG, CHINESE CHIEF STRATEGIST, SAXO MARKETS, HONG KONG
“For overseas creditors, the focus will be on whether the liquidator succeeds in having their requests for assistance granted to the mainland courts in Shanghai, Shenzhen and Xiamen under the cooperation mechanism established in 2021 and seizing assets on the mainland. For the shareholders of the (Evergrande) listed company in Hong Kong, the probability of obtaining anything from the liquidation process is very low.”
DAMIEN BOEY, CHIEF MACRO STRATEGIST, BARRENJOEY, SYDNEY
“These problems have been well known for a long time. The companies that are in trouble are the ones that we knew about, so I think the best thing you can do as a politician with declared political intent is to make sure that you take control of these processes, loosen up the processes and make them orderly. And I think that’s what they’re doing. So if you can do that, you can avoid further explosions and unexpected problems in real estate. And you can avoid some of the collateral damage.
“So, I think we are closer to the end of this shutdown cycle than we are to the beginning, provided that politicians do what the market really wants them to do, which is obviously stimulate growth and support the real estate sector and it seems to me they’re doing it.”
RAYMOND CHENG, HEAD OF CHINA RESEARCH, CGS-CIMB SECURITIES, HONG KONG
“The liquidation order will certainly be negative for Evergrande itself, the appointed liquidator will sell off the company’s assets as soon as possible and the price could be very bad.
“It may affect industry sentiment in the short term, but Evergrande’s restructuring has its own specific problems. It is possible that other developers are willing to make bigger compromises in negotiations as they fear creditors will demand liquidation.”
GARY NG, SENIOR ECONOMIST, NATIXIS
“It is not the end but the beginning of the long liquidation process, which will make Evergrande’s daily operations even more difficult. Since most of Evergrande’s assets are located in mainland China, there are uncertainties about how creditors will be able to seize the assets and the degree of repayment of offshore bondholders, and the situation could be even worse for shareholders. Investors will be worried if there will be a snowball effect on other developers as the queue for liquidation is long.”
ANDREW COLLIER, GENERAL DIRECTOR, ORIENT CAPITAL RESEARCH, HONG KONG
“The liquidation of Evergrande is a sign that China is willing to go to extreme lengths to quell the real estate bubble. This is good for the economy in the long term, but very difficult in the short term.”
WONG KOK HOONG, HEAD OF EQUITY TRADING, MAYBANK, SINGAPORE
“The Hang Seng Property Index continues to trade slightly higher. Evergrande (has been around) for a while now, I think investors are past that mark.”
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
“I think the biggest surprise here is that it took so long for Evergrande to liquidate. Clearing out the residue should be seen as a positive, but I doubt it will boost confidence in the real estate sector with this news alone.”
KEN CHEUNG, CHIEF ASIAN FX STRATEGIST, MIZUHO, HONG KONG
“The markets are still focused on the real estate downturn in China, so I think they will evaluate whether this liquidation or events (will) have any impact on the progress to turn around the real estate sector in China, and how the Chinese government will make any arrangements due to this type of impact of the court case.”
KENNY NG, SECURITIES STRATEGIST, CHINA EVERBRIGHT SECURITIES INTERNATIONAL COMPANY, HONG KONG
“This may further affect the confidence of mainland Chinese creditors and increase the difficulty of Evergrande’s restructuring in mainland China. At the same time, this may also affect investor confidence in mainland China’s real estate sector and the will of mainland Chinese residents to purchase property.This can have a dampening effect on the economy and the capital market.
“Whether offshore creditors will be able to seek the sale of Evergrande’s assets in mainland China will depend on whether mainland courts recognize or enforce Hong Kong’s liquidation order. If recognized or enforced, offshore creditors have the ability to claim the assets in the mainland. Otherwise they will only be able to apply for the liquidation of the assets in Hong Kong.”
BACKGROUND
* Evergrande defaulted on offshore debt in late 2021, becoming the symbol of the debt crisis that has engulfed China’s real estate sector.
* The world’s most indebted developer has about $300 billion in liabilities and $240 billion in assets.
* The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande’s Fangchebao unit, which said the developer had not honored an agreement to buy back shares it had bought in the subsidiary.
* Evergrande had been working on a $23 billion debt rollover plan for two years.
* His original plan was scuttled in late September when he claimed that its billionaire founder Hui Ka Yan was being investigated for suspected crimes.
* An ad hoc group of bondholders had sided with the developer in opposing the liquidation request until the last hearing in early December.