Hong Kong court orders liquidation of China’s indebted developer Evergrande

China’s most indebted property developer, China Evergrande, was ordered to liquidate by a Hong Kong court today, a move that could potentially destabilise the already trembling Chinese capital and property markets. The liquidation process could be intricate due to the multiple authorities involved and the potential political implications.

Following the order for liquidation, a provisional liquidator will be appointed, followed by an official liquidator who will then be tasked with managing and preparing the developer’s assets for sale to clear its debts. The liquidators may suggest a new debt restructuring plan to offshore creditors, who hold debt worth US$23 billion in Evergrande if they conclude the company possesses sufficient assets or if a likely investor emerges.

Moreover, the liquidators will be responsible for investigating the company’s affairs and could potentially refer any suspicious misconduct by directors to Hong Kong prosecutors. Despite the possibility of Evergrande appealing the liquidation order, the liquidation procedure would continue while the appeal is under consideration.

The issuance of the liquidation order led to the suspension of shares in Evergrande and its listed subsidiaries as listing rules necessitate a company to display a business structure with sufficient operations and asset values.

Evergrande, during a Hong Kong court hearing in July, referred to a Deloitte analysis that projected a recovery rate of 3.4% if the developer was liquidated. However, following Evergrande’s announcement in September about an investigation by authorities into its flagship unit and its chairman, Hui Ka Yan, creditors now anticipate a recovery rate of less than 3%. Evergrande’s dollar bonds were bid at around one cent on the dollar on Friday.

The majority of Evergrande’s assets have been seized or sold to creditors, leaving its two units listed in Hong Kong – Evergrande Property Services Group and Evergrande New Energy Vehicle Group. Their combined market capitalisation had plummeted to US$973 million by Friday. The liquidator could potentially sell Evergrande’s stakes in the two units, although finding buyers may prove challenging, reported Bangkok Post.

Liquidation orders

Following liquidation, the liquidator could potentially gain control of Evergrande’s subsidiaries throughout mainland China by gradually replacing their legal representatives, a process that could span months or even years. Insolvency experts have highlighted the difficulties the liquidator might face in changing the legal representatives, particularly as Guangzhou, where Evergrande is headquartered, does not mutually recognise liquidation orders with Hong Kong.

Even if the liquidator were to gain control of the units with onshore projects, many of these have already been seized by creditors, been frozen by courts, have minimal remaining value or are even in negative equity due to the declining property prices.

Liquidating the developer, which possesses assets worth US$240 billion, would undoubtedly send shockwaves through the already vulnerable capital markets. However, experts have noted that it would not provide a template for how liquidation might progress for other troubled developers. The enormity of Evergrande’s projects and debt would necessitate the involvement of numerous authorities and political considerations.

Ensuring the completion of ongoing home construction projects will be a primary concern for the company, the sector, and the government.

In related news, experts expressed concerns over China’s economic slowdown impacting Thai exports, tourism, investment, and property. Ongoing China-US tensions added uncertainty.