Evergrande, once China’s largest property developer, has collapsed.
The turning point came on January 29, when a Hong Kong court ordered the world’s most indebted property developer to be liquidated. The demise of the property giant was not a surprise. Its liquidity crisis became public knowledge in the second half of 2021.
But there are still concerns about how Evergrande’s downfall will affect the broader market. The property sector contributes about a quarter of China’s GDP.
“The disappearance of the real estate developer seems like a controlled collapse. It has been coming for some time, and few in the market are surprised by the situation,” he explains. Business Insider Kyle Rodda, market analyst at Capital.com, an online trading platform.
“However, it poses an added systemic risk and will, at the very least, expose some consumers to unpleasant haircuts on their assets as the business is dismantled,” Rodda added.
Here’s what the business looks like in what Rodda calls a “controlled demolition.”
What will happen now to Evergrande?
The court has appointed Alvarez and Marsal as liquidator to manage the company, Evergrande said in a statement to the Hong Kong Stock Exchange. Alvarez and Marsal will now take control of Evergrande’s assets and will prepare to sell them to settle the developer’s debts.
Foreign creditors are still counting on Evergrande’s liquidator to first propose a new foreign debt restructuring plan and only liquidate the developer’s assets if it cannot reach a deal with its creditors, they told Reuters. Reuters two anonymous sources.
Evergrande can still appeal the ruling, but the liquidation process will continue while the appeal is being resolved. Given Evergrande’s size, experts predict it could take years to complete the liquidation of the company.
More importantly, since the court order was issued in Hong Kong, it is also unclear whether 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 the 300 billion in debt?
Evergrande has assets worth 1.74 trillion Chinese yuan, or about 230 billion euros. However, the company owes almost 300 billion, which represents a huge deficit, and there is a clear order of priority when it comes to paying.
First, creditors will be paid with collateral, according to guidance from global law firm Baker McKenzie. This means that any collateral, such as property, that Evergrande has pledged to obtain loans will be used to pay those creditors.
Liquidators will be paid next, along with other expenses associated with the company’s liquidation. Evergrande’s employee salaries 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 as Evergrande’s liabilities outweigh its assets.
Foreign creditors are particularly vulnerable to losing their investments. This is because the authorities in Beijing will likely prioritise maintaining social and political stability on their own territory: they will protect domestic investors first and try to ensure that people who have paid for Evergrande’s properties get their homes back.
“Domestic market players are busy working to ensure that home buyers eventually receive the homes they have paid for one way or another, but retail investors in the company’s securities overseas will face even greater uncertainty and delays that will likely stretch for years,” he explains. Business Insider Daniel Margulies, partner at Dechert, a law firm specializing in restructuring in Asia.
Evergrande’s foreign creditors are owed $25.4 billion, but the company’s main holdings in Hong Kong, where it is listed, amounted to just $2.9 billion at the end of June, according to a court filing and calculations by the firm. Bloomberg.
In July, Evergrande cited a Deloitte analysis that estimated a debt recovery rate of 3.4% in the event of the company’s liquidation, according to ReutersCreditors now expect the recovery rate to be less than 3%, according to Reuters.
What about the rest of the Chinese property market?
Many of Evergrande’s property competitors are already in trouble and have defaulted on their debts.
But restructuring is not impossible. Debtwire data shows that 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 began — to the end of October 2023.
Evergrande, however, owes around $300 billion, or about 10 times more than the 32 developers mentioned collectively restructured. Overall, Evergrande’s fate seems like a warning sign for other Chinese companies, according to Margulies.
That’s because Evergrande’s court order to liquidate it indicates that problems of this magnitude in China “will likely result in some form of liquidation, either at home or abroad,” Margulies said.
How will Evergrande’s bankruptcy affect confidence in the Chinese economy and markets?
The situation is difficult.
China’s economy has been struggling to recover since it began lifting pandemic-related restrictions more than a year ago. It faces significant headwinds from the property crisis, deflationary pressure and demographic crisis.
China, the world’s second-largest economy, grew by 5.2% in 2023. The result was better than the 3% recorded in 2022, one of the worst for the economy in three decades.
Market sentiment on the Chinese economy is so negative that the country’s stock markets registered significant falls in the first weeks of January as investors ran away.
Moreover, the stock market losses occurred before Evergrande’s liquidation order.
Since Evergrande’s bankruptcy was not unexpected, the stock markets did not react much to the news. Hong Kong’s Hang Seng Index ended slightly higher on the day the court order was issued. The CSI 300 ended slightly lower, indicating that Evergrande’s liquidation has already been priced in and is being actively managed by the authorities.
“There are no signs of panic yet. If anything, this reveals the proactive and gradual approach that the authorities are taking to manage China’s painful economic restructuring,” Rodda said.
After several decades of rapid growth, China is trying to steer its economy towards a sustainable path. To do so, it has defined three new areas of growth: electric vehicles, lithium-ion batteries and solar cells.
“The liquidation of Evergrande is a sign that China is willing to go to extreme lengths to quell the property bubble,” he summed up. Reuters Andrew Collier, managing director of Orient Capital Research.
“This is good for the economy in the long term, but very difficult in the short term,” he added.
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Tags: China, Real estate market, Crisis