Liquidators for China Evergrande, the world’s most debt-laden developer, now have three separate legal teams to advise the property giant on its wind-up – which could last for more than a decade.
Many other indebted developers who slumped into default in recent years, including the giant private conglomerate Country Garden, are facing wind-up petitions, which looks likely to decimate the mainland’s property sector, and weigh on the economy for many years.
Capital Economics said in a report on Wednesday that “the drag from the unavoidable structural decline in China’s property sector has only just begun.
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“Property sales and project starts have collapsed. But property construction activity has retreated only a little. It is likely to halve in the next few years, triggering similar falls in demand for construction inputs. This would shave another percentage point off China’s average economic growth rate over the rest of this decade,” the report said.
While property sales and starts have slumped, Beijing has been able to support construction by boosting investment in the sector and pressuring developers to complete their work, analysts Mark Williams and Julian Evans-Pritchard wrote.
“A variety of approaches suggest that a sustainable level of residential construction activity is about half of what’s underway today, given China’s demographics and its need to replace aging housing stock.”
Real estate construction remains opaque in China, as most property data omits details that could help paint a clearer picture, or explain the apparent lack of weakness in new building.
Other countries that endure similar strife have experienced steep drop-offs that usually occur over three or four years, but they believed Beijing could drag the impact of its deleveraging process out so that it doesn’t fully materialize until 2030.
But they said: “Property construction still has a long way to fall.”
Evergrande wind-up may be messy
The biggest casualty so far has been China Evergrande and that could face a messy wind-up given news that founder Hui Ka Yan faces possible criminal charges, and other developments, such as an alleged marital ‘split’ with the capacity to delay the sale of assets.
Evergrande is a Guangzhou-based developer with more than $300 billion of total liabilities both onshore and offshore that went into default in December 2021.
In late January a Hong Kong judge ordered Evergrande to be liquidated after it had been unable to offer a concrete restructuring plan more than two years after defaulting on its offshore debt and following several court hearings.
Tiffany Wong and Eddie Middleton, the managing directors of Alvarez and Marsal (A&M), were appointed liquidators by a Hong Kong judge on January 29, bringing an end to more than 18 months of negotiations between the firm and offshore bondholders.
Now, sources have told Reuters that Clifford Chance, a global legal group, will assist Hong Kong firms Tanner De Witt and Karas So, which were asked recently to provide advice on the liquidation. The sources could not be identified discussing confidential information.
Karas So, which operates in association with London-headquartered firm Mishcon de Reya, declined to comment, while Wong and Middleton, A&M, Clifford Chance and Tanner De Witt also declined to comment.
Evergrande, meanwhile, did not respond to a request for comment.
Lawyers working on the case will look for, among a number of issues, evidence of wrongdoing and negligence across the company, its management and external advisers that could have led to Evergrande defaulting on its debt, the sources said.
Offshore investors expect that Evergrande’s liquidation could last for over 10 years, saying it could become a blueprint for major Chinese corporate winding-up processes in the future.
The pace of Evergrande’s liquidation would rely on whether mainland Chinese courts recognise the Hong Kong judgment. Recognising the ruling would allow creditors to seize unpledged onshore Chinese assets, a process that could take a number of years to complete, according to lawyers.
Kaisa Group wind-up hearing set back
Meanwhile, a Hong Kong court adjourned a hearing to liquidate Chinese property developer Kaisa Group till April 29 after a bond trustee, instructed by a major group of dollar bondholders, replaced the original petitioner.
The latest development came after Broad Peak Investment, which filed the wind-up petition in July in relation to non-payment of onshore bonds worth 170 million yuan ($24 million), sought to withdraw from the case as it has sold the debt holdings earlier this year.
Shenzhen-based Kaisa has been working on a debt restructuring for two years after defaulting its $12 billion of offshore debt in late 2021.
Kaisa is China’s second-largest issuer of offshore debt among developers after China Evergrande Group and was the first Chinese property developer to default on its dollar bonds in 2015.
Kaisa said in a filing on Friday that Citicorp International, the substituting petitioner, would file a re-amended petition against the company in relation to the non-payment of the 2023 notes with an outstanding principal of $750 million.
A lawyer for the ad-hoc bondholder group said after the hearing on Friday that Citicorp is the bond trustee and it acts on the instruction of the group.
A lawyer for Broad Peak in the last hearing in October cited a statement that Kaisa filed with the court, saying creditors would get less than 5% of their money back if it was forced into liquidation. Kaisa also said its cash to short-term debt ratio was 0.02 and that it was cashflow insolvent.
Kaisa had 232.5 billion yuan of total liabilities and 278.7 billion yuan of total assets as of the end of June 2023, according to its interim results.
- Reuters with additional input and editing by Jim Pollard
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