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- A Hong Kong court has ordered the liquidation of China Evergrande, the world’s most indebted real estate developer.
- Evergrande has assets of about $245 billion, but debts of about $300 billion.
- The end result will be a “controlled collapse” but will still raise systemic risks and harm investors, analysts say.
Evergrande, once China’s largest real estate developer, has gone bankrupt.
The pivotal moment came on January 29, when a Hong Kong court ordered the liquidation of the world’s most indebted property development company.
The demise of the real estate giant was not surprising, as cash shortages were made public in the second half of 2021.
However, there are still concerns about how Evergrande’s impact will affect the overall market, as the real estate sector accounts for about a quarter of China’s GDP.
“The demise of real estate developers appears to be a controlled collapse. The writing has been on the wall for a long time,” said Kyle Rodda, senior market analyst at online trading platform Capital.com. Few people are surprised by this situation.” Business Insider.
“But it will increase systemic risk at the margins, and at least some people will see their assets trumped up in an ugly way as their businesses are dismantled,” Rodda added.
This is what Rodda calls a “controlled demolition” agreement.
What’s next for Evergrande?
Evergrande said the court appointed Alvarez and Marsal as liquidators to run the company. filing To the Hong Kong Stock Exchange.
Mr. Alvarez and Mr. Marsal will now manage Evergrande’s assets and prepare them for sale to pay off the real estate developer’s debts.
Offshore creditors still expect Evergrande’s liquidators to first propose a new offshore debt restructuring plan and liquidate the property developer’s assets only if an agreement cannot be reached with creditors, the anonymous source said. two sources told Reuters.
Evergrande can still appeal the judgment, but the liquidation process will continue pending the outcome of the appeal.
Given Evergrande’s size, experts predict that the company’s liquidation could take several years to complete.
Importantly, since this court order was made in Hong Kong, it is unclear whether mainland authorities will recognize and comply with the order. This is important because most of Evergrande’s assets are in mainland China.
So what happens to that $300 billion in debt?
Evergrande has assets worth 1.74 trillion Chinese yuan (approximately $245 billion). But the company has about $300 billion in debt, which is a significant shortfall, and it has clear priorities when it comes to paying it off.
According to a guide from international law firm Baker McKenzie, secured creditors are paid first. This means that collateral such as real estate pledged by Evergrande for loans will be used to repay such creditors.
The liquidator will then be paid along with other costs associated with winding up the company. Evergrande employee wages and debts to the government come next, followed by unsecured creditors such as bondholders, suppliers and contractors.
At the bottom of the list are Evergrande’s common shareholders.
Overall, Evergrande’s debt exceeds its assets, so returns to unsecured creditors and shareholders are likely to be low.
Offshore creditors are particularly at risk of losing their investments. Beijing authorities are likely to prioritize maintaining social and political stability at home, first protecting domestic investors and ensuring that those who paid for Evergrande properties end up losing their homes. I’ll try my best to get it.
“Domestic stakeholders are working hard to ensure that homebuyers somehow end up receiving the homes they paid for, but individual ‘mom friend’ investments in the company’s offshore securities Homes are facing further uncertainty and delays, and this will likely continue. ” Daniel Margulies, a partner at Dechert, a law firm specializing in Asian restructuring, told BI.
Evergrande’s offshore creditors owe $25.4 billion, but the court said the company’s main holdings in Hong Kong, where it is listed, were worth just $2.9 billion at the end of June. document and Bloomberg calculations.
In July, Evergrande cited a Deloitte analysis that estimated the debt recovery rate if the company liquidated was 3.4%, according to Reuters. According to Reuters, creditors now expect recovery rates to be less than 3%.
What will happen to the rest of China’s real estate market?
Many of Evergrande’s real estate peers are already in financial trouble and defaulting on their debts.
But rebuilding is not impossible. According to Debtwire data, 32 Chinese developers received 42 loans covering 104 tranches of offshore bonds worth $33.1 billion from July 2021, around the start of the current real estate crisis, to the end of October 2023. It was shown that the company had managed to complete the restructuring process.
However, Evergrande has about $300 billion in debt, which is about 10 times the amount that the 32 developers mentioned above collectively restructured.
In general, Evergrande’s fate appears to be a warning sign for other Chinese companies, Margulies said.
That’s because the court’s liquidation order against Evergrande suggests that a problem of this magnitude in China is “likely to be liquidated in some form, whether on land or at sea,” Margulies said. he said.
What impact will Evergrande’s bankruptcy have on China’s economy and market sentiment?
It’s tough outside.
China’s economy has struggled to recover since it began lifting pandemic-related restrictions more than a year ago. facing significant headwinds from property crisis, deflation pressure, and Population crisis.
China, the world’s second largest economy, had a growth rate of 5.2% in 2023. That was better than the 3% rate in 2022, which was hit by the coronavirus, but still one of the worst economic growth rates in 30 years.
Market sentiment regarding the Chinese economy is very poor. Stock market sold off sharply In the first few weeks of January, investors rushed to the door en masse.
Notably, the stock market decline preceded Evergrande’s liquidation order.
Given that Evergrande’s demise was not unexpected, the market did not react well to this news. On the day the court order was handed down, Hong Kong’s Hang Seng Index ended slightly higher. The CSI 300 ended slightly lower, indicating that Evergrande’s liquidation has been priced in and is being actively managed by authorities.
“There are no signs of panic yet. On the contrary, it is clear that authorities are adopting an aggressive and gradualist approach to managing China’s painful economic reforms,” Rodda said. Stated.
After decades of incredible growth, China is planning a transition to an economy on a sustainable trajectory. It details three new growth areas: electric vehicles, lithium-ion batteries, and solar cells.
“Evergrande’s liquidation is a sign that China is willing to go to extreme measures to defuse the real estate bubble,” Andrew Collier, managing director at Orient Capital Research, told Reuters. Told.
“This is good for the economy in the long term, but it’s very difficult in the short term,” he added.
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