- On 29 January, China Evergrande received a forced liquidation order from the Hong Kong Court. The judge made this decision because of the failure to deliver a restructuring proposal by the Group, and "it is the time for the court to say enough is enough".
- It is reported that the major ad hoc creditor group has chosen to support the winding-up order, as the alternative proposal put forward by Evergrande is simply unacceptable. In September last year, the original restructuring plan was terminated because the Group could not obtain the approval from Mainland government to issue new bonds. Later, Evergrande proposed an alternative plan to convert part of the debts into 17.8% stakes in China Evergrande, 30% stakes in each of the Evergrande Property Services and Evergrande New Energy Vehicle, and repaying the rest with non-tradeable certificates backed by offshore assets.
- Given that Evergrande is not willing to give up its entire shareholding of Evergrande Property Services and Evergrande New Energy Vehicle (approximately 52% and 59% ownership respectively), we consider it reasonable for the ad hoc group to support the winding-up order.
- In fact, the lack of constructive dialogues between Evergrande and the ad hoc group was also a key factor. Last year, there was reported that the Chinese government “has an opinion on Evergrande and is watching it more closely”. Since then, authorities have detained Evergrande’s Chairman and major shareholder Hui Ka Yan, ex-CEO Xia Haijun and ex-CFO Pan Darong, and the latest one who got swept up by criminal investigation was Liu Yongzhuo, the President of Evergrande New Energy Vehicle. As a result, we believe that the Group may be without the key persons who can really make important decisions now.
- After the announcement of winding-up order, the court has appointed Alvarez & Marsal as liquidator to arrange creditors’ meeting and execute asset disposal. In other words, unless Evergrande appeals for the case, or the liquidator reinitiates the debt restructuring because of any specific reasons such as an observable improvement of business performance or an arrival of a white knight, otherwise there will no longer be any restructuring plan.
- At this point, whether the liquidator can squeeze the maximum value out of Evergrande’s offshore assets will be the key to determine the recovery value of the bonds. Therefore, the capability of the liquidator is very important. Alvarez & Marsal is an advisory firm that has ample experience on restructuring and winding-up cases of large corporations, including the liquidation projects of Lehman Brothers and Luckin Coffee. The company is also the preferred candidate of the ad hoc group.
- On the other hand, upon the signing of the agreement on mutual recognition of insolvency proceedings between Hong Kong and Mainland China in 2021, liquidators from Hong Kong should be able to apply to Mainland courts for recognition of insolvency proceedings in Hong Kong. With reference to HNA Group, Hong Kong Court has recognized the restructuring order announced by Hainan Court. However, even if the order is approved by the court in Mainland China, can the liquidator really penetrate into the onshore market and take over the onshore assets owned by China Evergrande? We think it may not be an easy task because of the size and impact of the Group.
- Still, we believe that the most valuable assets owned by Evergrande are still the offshore assets, which include the listed shares of Evergrande Property Services and Evergrande New Energy Vehicle, as well as the proceeds receivables from disposal of HengTen Networks. Meanwhile, the Group owns most of its onshore assets indirectly through its subsidiary Hengda Real Estate, which the latter is also in debt woes now. According to the liquidation analysis conducted by Deloitte in July last year, the unsecured creditors of Hengda Real Estate were estimated to recover less than 5% as well, which means that it is virtually impossible to have any residual value returning to the parent company China Evergrande.
- The forced liquidation of Evergrande should be well expected after the collapse of restructuring plan in last year. As we think that the Group will not be able to push forward a new restructuring plan in the foreseeable future, the winding-up order comes earlier may not be a bad thing, as it may prevent the assets from further depreciating and protect the final recovery value.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in EVERRE 8.250% 23Mar2022 Corp (USD) and EVERRE 7.500% 28Jun2023 Corp (USD), and the analyst who produced this report holds a NIL position in the abovementioned securities.
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