- A Hong Kong court ordered the liquidation of China Evergrande, the world’s most indebted property developer.
- Evergrande has assets of about $245 billion, but owes about $300 billion.
- Its demise is a “controlled collapse,” but still raises systemic risk and will hurt investors, says an analyst.
Evergrande — once China’s largest real-estate developer — has collapsed.
The pivotal moment came on January 29, when a Hong Kong court ordered the liquidation of the most indebted property developer in the world.
The demise of the property giant wasn’t a surprise, since its cash crunch was made public in the second half of 2021.
But there are still concerns about how Evergrande’s fallout will affect the broader market, since the property sector contributes to about one-quarter of China’s GDP.
“The property developer’s demise looks like a controlled collapse. The writing was on the wall long ago, and few in the market are surprised by the situation,” Kyle Rodda, a senior market analyst at Capital.com, an online trading platform, told Business Insider.
“However, it raises systemic risk at the margins and, if nothing else, will expose some to ugly haircuts on their assets as the business is pulled apart,” Rodda added.
Here’s the deal in what Rodda calls a “controlled demolition.”
What happens next to Evergrande?
The court has appointed Alvarez and Marsal as liquidator to manage the company, Evergrande said in a filing to the Hong Kong Stock Exchange.
Alvarez and Marsal will now take control of Evergrande’s assets and prepare to sell them to repay the real-estate developer’s debts.
Offshore creditors still expect Evergrande’s liquidator to propose a new offshore debt restructuring plan first and only liquidate the property developer’ assets if it cannot come to an agreement with its creditors, two unnamed sources told Reuters.
Evergrande can still appeal the judgement, but the liquidation process will continue while the outcome of the appeal is pending.
Given the size of Evergrande, experts expect that it could take years to complete the liquidation of the company.
Importantly, since the court order was made in Hong Kong, it’s also unclear if mainland authorities will recognize and comply with the order. This is important because most of Evergrande’s assets are in mainland China.
And what about that $300 billion in debt?
Evergrande owns assets worth 1.74 trillion Chinese yuan, or about $245 billion. However, the company owes about $300 billion — a big shortfall, and there’s a clear order of priority when it comes to repayments.
First, secured creditors will be paid, according to a guide by international law firm Baker McKenzie. This means any collateral, such as property, that Evergrande pledged for loans will be used to pay such creditors back.
Then, the liquidators will be paid, alongside other expenses associated with the winding down of the firm. Evergrande employee wages and debts to the government are next, followed by unsecured creditors, such as bondholders, suppliers, and contractors.
At the bottom of the list are Evergrande’s ordinary shareholders.
Overall, returns to unsecured creditors and shareholders are likely to be low, since Evergrande’s liabilities outstrip its assets.
Offshore creditors are particularly vulnerable to losing their investments. That’s because Beijing authorities will likely prioritize maintaining social and political stability on their home turf: They’ll protect investors at home first, and try to ensure that people who have paid for Evergrande properties eventually get their homes.
“Onshore stakeholders are busy working to ensure home purchasers will eventually receive the homes they have paid for one way or another, but retail ‘mom and pop’ investors in the company’s offshore securities will be facing even further uncertainty and delay which would likely continue for years,” Daniel Margulies, a partner at Dechert, a law firm that specializes in restructuring in Asia, told BI.
Evergrande’s offshore creditors are owed $25.4 billion, but the company’s key holdings in Hong Kong, where it is listed, added up to just a paltry $2.9 billion at the end of June, according to a court document and Bloomberg’s calculations.
In July, Evergrande cited an analysis by Deloitte that estimated a recovery rate of 3.4% on its debt if the company is liquidated, per Reuters. Creditors now expect the recovery rate to be less than 3%, according to Reuters.
What happens to the rest of China’s property market?
Many of Evergrande’s real-estate peers are already in trouble and have defaulted on their debts.
But restructuring isn’t impossible. Debtwire data showed 32 developers in China managed to complete 42 restructuring processes covering 104 tranches of offshore bonds worth $33.1 billion from July 2021 — around the time the current property crisis started — to the end of October 2023.
However, Evergrande owes around $300 billion — which is about 10 times more than what was collectively restructured by the 32 developers above.
At large, Evergrande’s fate reads like a warning sign to other companies in China, Margulies said.
That’s because the court order to liquidate Evergrande signals that problems of this size in China “will likely end up in some form of liquidation, whether onshore or offshore,” Margulies said.
How will the Evergrande collapse impact sentiment in China’s economy and markets?
It’s tough out there.
China’s economy has been struggling to recover since it started lifting pandemic-related restrictions more than a year ago. It’s facing significant headwinds from a property crisis, deflationary pressure, and a demographic crisis.
China, the world’s second-largest economy, grew 5.2% in 2023. While that was better than the COVID-battered performance of 3% in 2022, it’s still one of the economy’s worst showings in three decades.
Market sentiment over China’s economy is so bad that the country’s stock markets sold down massively in the first weeks of January as investors made a dash for the door.
Notably, the stock market sell-off came before Evergrande’s liquidation order.
Given that Evergrande’s demise wasn’t unexpected, the markets didn’t react much to the news. Hong Kong’s Hang Seng index ended up slightly higher the day the court order was made. The CSI 300 ended slightly down, indicating that Evergrande’s winding-up has been priced in and is being actively managed by authorities.
“There are no signs of panic yet. If anything, it reveals the proactive and incrementalist approach authorities are adopting to manage China’s painful economic reformation,” said Rodda.
China is trying to engineer the transition of its economy after several decades of breakneck growth to one that is on a sustainable trajectory. It has detailed the three new growth areas of electric vehicles, lithium-ion batteries, and solar cells.
“Evergrande’s liquidation is a sign that China is willing to go to extreme ends to quell the property bubble,” Andrew Collier, a managing director at Orient Capital Research, told Reuters.
“This is good for the economy in the long term but very difficult in the short term,” he added.
