Beijing August 18 2023: Struggling real estate developer China Evergrande Group (3333.HK) has taken steps to safeguard itself from creditors by filing for protection in a U.S. bankruptcy court as part of its comprehensive debt restructuring process. This move comes amid growing concerns about China’s deepening property turmoil and a weakening economy.
Undergoing the process under Chapter 15 of the U.S. bankruptcy code, China Evergrande seeks shelter for its non-U.S. operations from creditors who might attempt to take legal action against the company or seize assets within the United States.
Although the filing has procedural significance, sources familiar with the matter revealed that this action is a necessary part of the company’s debt restructuring procedure under U.S. law. China Evergrande, holding the title of the world’s most indebted property developer with liabilities exceeding $300 billion, faces these requirements.
This offshore debt restructuring endeavor encompasses a total of $31.7 billion, encompassing bonds, collateral, and repurchase obligations. The sources, due to the sensitive nature of the matter, chose to remain anonymous.
Once a prominent real estate player in China, Evergrande has turned into a symbol of the country’s unprecedented property-related debt crisis. The sector constitutes about 25% of the economy. The company fell into a liquidity crisis in mid-2021, leading to a series of defaults by various Chinese property developers on their offshore debt, causing stalled construction projects, plummeting sales, and a considerable blow to investor confidence.
The property sector crisis has not only contributed to financial contagion risks but also added to the strain on an already weakened economy characterized by sluggish domestic spending, declining factory activities, rising unemployment, and feeble international demand.
Simultaneously, property investment, home sales, and new construction have experienced continuous contraction for over a year. Major global financial institutions, like Morgan Stanley, have revised their growth forecasts for China, now projecting a GDP growth rate of 4.7% for the current year, down from the initial forecast of 5%.
As part of its restructuring strategy, Evergrande announced an offshore debt restructuring plan in March, aiming to gradually resume operations and generate cash flow. The company is currently working to garner support from its creditors to finalize this process.
Creditor voting on Evergrande’s restructuring proposal is scheduled for later this month, with potential approvals from courts in Hong Kong and the British Virgin Islands in early September.
An affiliated company of Evergrande, Tianji Holdings, also initiated Chapter 15 protection in a Manhattan bankruptcy court.
In its filing, Evergrande stated its intention to seek recognition of ongoing restructuring discussions in Hong Kong, the Cayman Islands, and the British Virgin Islands. The company has proposed a Chapter 15 recognition hearing for September 20.
This scenario isn’t unique; in June of the previous year, another Chinese developer, Modern Land (China) Co. Ltd (1107.HK), which had defaulted on offshore bonds due in October 2021, had pursued Chapter 15 recognition under the bankruptcy code in New York.
Trading of China Evergrande shares has been suspended since March 2022. On Friday, shares of Evergrande Services (6666.HK) plummeted over 12%, while China Evergrande New Energy Vehicle Group (0708.HK) experienced an 8% decline.
