China Evergrande, once China’s most prolific real estate developer, has narrowly averted a long-awaited liquidation.
A Hong Kong bankruptcy judge on Monday gave Evergrande another two months to negotiate a deal with foreign investors who lost money when the company defaulted two years ago with hundreds of billions of dollars in debt. The judge scheduled another court hearing for January 29th.
It was an unexpected development in a bankruptcy lawsuit filed 18 months ago by an investor who was so desperate to get paid that he sued to have Evergrande dissolved. Judge Linda Chan had said in October that she was prepared to order Evergrande’s liquidation if it could not reach an agreement with its creditors on the division of some of the company’s remaining assets.
But on Monday, Judge Chan gave Evergrande another chance after a lawyer for the investor who originally sued the company, who announced in court as the plaintiff, said his client was no longer actively seeking liquidation, causing confusion among lawyers and advisers led other creditors who had gathered in court.
“We thought the company would wind up today,” said Neil McDonald, a partner at law firm Kirkland & Ellis, which is advising creditors. “The plaintiff changed his position and did not push for the company to be dissolved, which was a surprise to us,” Mr. McDonald said, adding that he was informed of the change 15 minutes before Monday’s hearing. He and another creditors’ adviser said they would have opposed an adjournment if they had been given longer notice.
The split among creditors was another inconclusive twist in a long and still unresolved case that will ultimately determine Evergrande’s ultimate fate.
For two decades, Evergrande was considered an example of success in China. It was among the most powerful companies in the country and was at the center of a real estate industry that was crucial to the country’s economic growth. But years of overexpansion caused the company to default on more than $300 billion in past-due bills.
Evergrande’s default plunged China’s real estate market into crisis and left many Chinese households despondent about the real estate market, the main store of wealth for most families. Since Evergrande’s financial situation has increasingly deteriorated in recent months, investors now expect little in return.
Since then, Evergrande has been operating in limbo – unable to meet its obligations but not officially dead. Numerous questions remain for the hundreds of thousands of Evergrande homebuyers who are still owed their unfinished properties, for the many workers who built and sold their homes but received no compensation, and for the Chinese banks and investors who have given money to the company in the expectation of being paid back.
Of all the people Evergrande owes money to, the foreign creditors fighting the company in court are the most public. But they deserve the smallest share of the largest dismantling of a Chinese company in history.
Behind the scenes, Chinese authorities and regulators working to stabilize the entire real estate sector will have the final say on what happens to Evergrande.
Evergrande had been working on a repayment plan with offshore creditors this summer, but had the deal collapse in September when the company’s founder and chief executive, Hui Ka Yan, was arrested by authorities. A deal, Evergrande said at the time, was no longer possible because of new regulations that prevented the company from issuing the shares or selling the bonds it would need to finance a restructuring deal.
On Monday, Evergrande’s lawyer explained in court his planned plan to circumvent these rules. Judge Chan interrupted him and warned him to involve the Chinese government in the company’s plans to ensure that such a deal was possible. “I would have thought that speaking directly to the relevant authorities would be a more reliable source,” Judge Chan said.
Before Monday, most people involved thought this would be the last hearing. When Judge Chan adjourned a previous hearing on October 30, she said it was “most likely” the company’s final reprieve.
However, liquidation is still possible despite the recent adjournment. If creditors are dissatisfied with the new restructuring plan, as many appeared to be on Monday, they can enforce their demand to break up Evergrande on January 29th.
A liquidation of Evergrande would be chaotic and could take years. Evergrande has a convoluted business structure. Three companies are listed outside China on the Hong Kong Stock Exchange, including the holding company. In addition, the company has thousands of subsidiaries in China and more than 1,000 real estate projects – assets that would likely be out of reach for investors in Hong Kong.