China's Evergrande Group is finally being liquidated more than two years after it defaulted, thanks to a court order out of Hong Kong.
Widely recognized as the world's most indebted developer, Evergrande currently holds more than $330 billion in total liabilities, which Justice Linda Chan says necessitates a liquidation.
Since Evergrande has been unable to offer any kind of concrete restructuring plan, despite many months of delays and repeated court hearings, Justice Chan decided to force the failed developer to start paying up by liquidating its assets.
"It is time for the court to say enough is enough," Justice Chan said in a preliminary statement preceding a more detailed statement of reasoning she released later in the day following the ruling.
In a statement to Chinese media, Evergrande chief executive Siu Shawn said the company will continue to ensure the completion of existing home building projects despite the liquidation order, which he says will not affect the operations of Evergrande's onshore and offshore units.
(Related: Learn more about the Evergrande debacle from our earlier coverage.)
How will China treat Evergrande's foreign investors?
As with any liquidation, the process will take some time, especially considering the size and scope of Evergrande's operations. There are sure to be many complications and political considerations, not to mention the global impact of the company's failure.
Offshore investors will now be paying very close attention to how Chinese authorities treat foreign creditors when a Chinese company fails.
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"It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande's daily operations even harder," commented Gary Ng, senior economist at Natixis.
"As most of Evergrande's assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders, and the situation can be even worse for shareholders."
Prior to the hearing, Evergrande's share price had tanked by about 20 percent. Following the verdict, trading was halted in China Evergrande and its listed subsidiaries China Evergrande New Energy Vehicle Group and Evergrande Property Services.
China's capital and property markets were already on very thin ice as it is prior to the ruling. With $240 billion in assets, which is substantially less than its liabilities, Evergrande threatens to potentially take down the Chinese economy.
China's economy performed much worse in 2023 than authorities anticipated, and is currently struggling through its worst property market in nine years. China's stock market is also wallowing near five-year lows as concerned investors pull their money out of China.
After applying for another adjournment, Evergrande's lawyer said "some progress" was made on the company's restructuring proposal. In the latest offer, the failed developer proposed that creditors swap their debts into all the shares the company holds in its two Hong Kong units as opposed to taking stakes of around 30 percent in the company's subsidiaries, which is what was proposed ahead of the last hearing in December.
Liquidation threatens to harm the operations of Evergrande, the company's lawyer argued, including its property management and electric vehicle (EV) units. He added that Evergrande's ability to repay all creditors will be hampered by the decision.
For the past two years, Evergrande has been working on a massive $23 billion debt revamp plan with a group of creditors known as the ad hoc bondholder group.
"We're not surprised by the outcome and it's a product of the company failing to engage with the ad hoc group," commented Fergus Saurin, a Kirkland & Ellis partner who advised the offshore bondholders.
"There has been a history of last-minute engagement which has gone nowhere. And in the circumstances, the company only has itself to blame for being wound up."
China's economy is in the tank, and it could drag the rest of the world's globalized economies with it. Learn more at CommunistChina.news.
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