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Updated January 26th, 2024 at 12:44 IST

Evergrande's potential liquidation: Implications and potential scenarios

A major offshore bondholder group of China Evergrande is considering supporting a petition for the liquidation of the beleaguered developer.

Business Desk
China real estate
China real estate | Image:Shutterstock
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A major offshore bondholder group of China Evergrande is considering supporting a petition for the liquidation of the beleaguered developer in a Hong Kong court hearing scheduled for Monday, news agency Reuters reported.

The bondholder group, holding over $2 billion in offshore notes backed by Evergrande, backing a winding-up petition heightens the likelihood of an immediate liquidation order from the court, according to legal experts. Let's delve into what could unfold if the court orders Evergrande's liquidation and its potential repercussions.

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Possible outcomes of a liquidation order

Appointment of liquidators: If a liquidation order is issued, provisional and then official liquidators would be appointed to take control of Evergrande's affairs and prepare for the sale of its assets to settle debts.

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Debt restructuring proposal: Liquidators may propose a new debt restructuring plan to offshore creditors holding $23 billion of Evergrande's debt, exploring options if sufficient assets are identified or a potential investor emerges.

Investigation into company affairs: Liquidators would scrutinise Evergrande's operations, potentially referring any suspected misconduct by directors to Hong Kong prosecutors.

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Potential appeal by Evergrande: While Evergrande could appeal a liquidation order, the liquidation process would continue during the appeal period.

Trading suspension uncertainty: The status of Evergrande shares remains uncertain post-liquidation. Listing rules typically require a company to demonstrate a viable business structure with adequate operations and asset values.

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Debt recovery and main challenges

Estimated recovery rate: Evergrande previously cited a Deloitte analysis estimating a recovery rate of 3.4% if the developer undergoes liquidation. However, concerns have grown, and creditors now anticipate a recovery rate of less than 3% due to uncertainties surrounding Evergrande's legal and financial issues.

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Bond valuations: Evergrande's dollar bonds were reportedly bid at around one cent on the dollar, reflecting pessimism among investors.

Asset situation: Most of Evergrande's assets have been sold or seized by creditors. The remaining units listed in Hong Kong, namely Evergrande Property Services Group and Evergrande New Energy Vehicle Group, face challenges in finding buyers.

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Subsidiaries control: The liquidator, in the event of a liquidation order, could take control of Evergrande's subsidiaries in mainland China. However, the process might face challenges, particularly due to limitations in Guangzhou, Evergrande's base, which doesn't mutually recognize liquidation orders with Hong Kong.

Impact on China's property market

Market shockwaves: Evergrande's liquidation, given its colossal $240 billion in assets, would undoubtedly send shockwaves through already fragile capital markets.

Priority on home construction: Despite the upheaval, completing ongoing home construction projects would likely be a top priority for Evergrande, the real estate sector, and the government.

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(With Reuters inputs)

 

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Published January 26th, 2024 at 12:44 IST

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