An application in the United States seeking protection from creditors while Evergrande Group restructures its heavy debt has burdened Chinese stocks as it fueled investors’s concerns about China’s property crisis.
Evergrande asked protection from creditors under Chapter 15 of the US bankruptcy code, which is invoked when insolvency cases involve multiple countries. The company said it needs the protection while it makes efforts to restructure its debt during upcoming negotiations in Hong Kong and the Cayman Islands. Chapter 15 is used less commonly than chapters 7 and 11.
Hui Ka-yan, chairman of Evergrande, explained in a stock exchange filing on Friday that the company’s bankruptcy protection application is a normal procedure for offshore restructuring and does not involve an actual bankruptcy petition. He said the company is pushing forward its offshore debt restructuring as planned.
The Shenzhen-based property developer, which defaulted in mid-2021 and started restructuring its debt early last year, filed for Chapter 15 protection in New York on Thursday. The company proposed scheduling a Chapter 15 recognition hearing for September 20.
The Hang Seng Index, Hong Kong’s stock market benchmark, fell 375 points or 2.1% to close at 17,950 on Friday, the lowest level in 10 months and below the psychological mark of 18,000. The Shanghai Composite Index fell 31 points or 1% to 3,131 on Friday.
In fact, the Hang Seng Index has dropped by 10.6% so far this month while the Shanghai Composite Index has plunged 4.8%. Reuters reported on Tuesday that global hedge funds were dumping Chinese stocks in the first two weeks of this month due to fears about China’s property crisis.
Simon Lee Siu-po, a senior lecturer at the Chinese University of Hong Kong Business School, told the Hong Kong media that with bankruptcy protection in the US, Evergrande can prevent American banks from filing lawsuits against it and buy more time to restructure its offshore debts and continue its property projects.
Lee said it’s a political decision that Evergrande has not gone bankrupt in China as its bankruptcy would lead to a suspension of construction works and also hit its lenders.
He said it’s possible that other indebted Chinese property developers, such as Country Garden, will also file for bankruptcy protection in the US. However, he said more applications of this sort would hurt foreign investors’ confidence in the Chinese property sector.
Liu Zefeng, a Beijing-based solicitor at Jing Zhe Law Firm, told the mainland media that a company can apply for bankruptcy protection if its liabilities are more than its assets.
“If a company can successfully restructure its debts, it can ‘wake from the dead and return to life,’” Liu said. “The chance for Evergrande to have a successful debt restructuring is high as creditors can restore much more money from a haircut than a liquidation.”
He added that it’s unlikely that Evergrande’s debt restructuring or liquidation would affect Chinese homebuyers as they are well protected by China’s laws.
However, Evergrande is facing rising challenges with its huge losses and liabilities and its subsidiaries’ weakening share prices.
The company said on July 17 that it lost a combined 803 billion yuan (US$110 billion) in 2021 and 2022. At the end of last year, it had net current liabilities of 687.7 billion yuan and total liabilities of 2.44 trillion yuan.
Two main proposals
Trading of Evergrande’s shares has been suspended since March 2022 due to its offshore debt restructuring. According to the Hong Kong stock exchange’s rules, if the trading cannot be resumed by September 20, the shares must be delisted.
On March 22 this year, Evergrande said it had engaged in constructive dialogue with the stakeholders of its and its subsidiary’s US dollar-denominated senior secured notes worth a total of US$19.12 billion.
The company proposed to its creditors that it either issues them new notes that will mature in 10 to 12 years, or bonds that are exchangeable into 21.57% of Evergrande Property Services (EVPS)’s shares and 28.54% of Evergrande New Energy Vehicle (NEV)’s shares.
The convertible bonds are only worth HK$9.38 billion (US$1.2 billion) at the current values of the EVPS and NEV. They are equivalent to 6.3% of the unpaid senior secured notes.
Shares of EVPS fell 9.1% to close at 60 HK cents while shares of NEV dropped 16% to HK$1.26 on Friday. Shares of EVPS and NEV are 60% and 73.9% off, respectively, from their levels in March.
On August 14, Evergrande said NWTN, a Dubai-based and Nasdaq-listed company, agreed to purchase a 27.5% stake in NEV for US$500 million, or 63 HK cents per share, which represents a 59% discount to the average closing price of HK$1.55 for the last five trading days.
The Securities Times said NWTN, formerly known as ICONIQ, was founded by a 41-year-old Zhejiang man called Wu Nan in 2014 and had cash and cash equivalents of US$212 million and total liabilities of US$71.97 million at the end of 2022. It said NWTN had zero revenue in the past three years.
Evergrande will then issue convertible bonds for NEV’s shares to its creditors. NWTN will become the largest single shareholder of NEV.
Evergrande said in March that if it is forced to liquidate its assets, offshore holders of its senior secured notes can only recover about 5.92 to 9.34% of their money while other offshore unsecured creditors can get back 2.05 to 3.53%.
Since 2022, the company has extended payment dates for nine onshore corporate bonds, comprising 53.5 billion yuan in principal and 3.7 billion yuan in interest. Besides, its overdue onshore debts amounted to 749.2 billion yuan, including 208.4 billion yuan of interest-bearing debt, 326.3 billion yuan of commercial papers and 157.3 billion yuan of contingent liabilities, at the end of last year.
The company said it will have to raise about 250 to 300 billion yuan in the next three years to complete its core task of “ensuring delivery of properties.”
Read: China’s property crisis hits state-owned developers
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