Evergrande Must Liquidate in HK

Shares in Evergrande plunged following the liquidation order

Big corporate news today -- a Hong Kong court has ordered China Evergrande, the world's most indebted property developer, to go into liquidation after it still could not restructure the over US$300 billion it owed banks and bondholders.

Judge Linda Chan approved a petition by the creditors on Monday, though the Guangzhou-based company can still appeal. A provisional liquidator was to be named later on Monday.

"The hearing has lasted for one and a half years, and the company still has not been able to bring forward a concrete restructuring proposal" to restructure its US$328 billion in liabilities, Justice Chan said in her ruling. "I think it is the time for the court to say enough is enough."

Liquidation only affects Hong Kong operations

Following the liquidation order, shares in Evergrande group plunged. Evergrande Group fell 21 percent to 16.3 cents, Evergrande New Energy Vehicle Group dropped 18 percent to 23 cents, and Evergrande Property Services Group Limited decreased 2.5 percent to 39 cents before trading in all three shares were halted.

Interestingly at the same time other Chinese developers' shares rose in Hong Kong, with Country Garden gaining 2.9 percent, and Sunac China Holdings jumping 4 percent. 

Evergrande CEO Shawn Siu told Chinese news outlet 21Jingji that the order only affects the Hong Kong-listed China Evergrande unit, and that the company feels "utmost regret" at the liquidation order.

He said Evergrande would strive to continue smooth operations and deliver properties to buyers. It has some 1,200 projects in different stages of progress, ranging from under construction to almost completed, according to its 2022 annual report.

It is unclear how the liquidation in Hong Kong will affect the company's operations in China. Lance Jiang, a partner at Ashurts LLP says the liquidators may have a challenge ahead.

Evergrande has over 1,200 projects in progress

"The market will pay close attention to what the liquidators can do after being appointed, especially whether they can achieve recognition from any of the three designated courts in the People's Republic of China under the 2021 Arrangement regarding Cooperation on Cross-border Insolvency Cases between the mainland and Hong Kong."

In any event, the provisional liquidators can now take over Evergrande's management and handle its affairs, including debt restructuring with creditors and taking control of its assets, books and records.

Creditors need to submit a proof of debt form to the liquidator, and staff of Evergrande Hong Kong can claim unpaid salaries and dues from the Protection of Wages on Insolvency Fund. 

While for many years real estate drove China's economic boom, developers borrowed heavily, leveraging projects to get more capital to the point where the total corporate, government and household debt was the equivalent of more than 300 percent of annual economic output, unusually high for a middle-income country.

The ruling in Hong Kong also shows creditors there can use the rule of law to force the company into liquidation, something which might be harder to do across the border...