China’s Evergrande Seeks Debt Relief in the US Amid $32 Billion Overhaul

Evergrande Group has sought protection under Chapter 15 of the United States bankruptcy code.

Evergrande Group, the Chinese real-estate developer has filed for bankruptcy protection in a US court. This decision comes as part of their debt restructuring process, as stress mounts over the country’s weakening economy and aggravating property crisis. The company is the world’s most heavily indebted property developer and an important piece of the country’s property crisis.

Evergrande Group has sought protection under Chapter 15 of the United States bankruptcy code, as a part of its restructuring process, which protects its US assets. Chapter 15 also provides mechanisms for dealing with insolvency cases involving more than one country. Even though the filing is procedural, the company had to do it as a part of its restructuring process since it is a developer with more than $30 billion in liabilities. The company’s offshore debt restructuring involves everything including collaterals, bonds, and repurchase obligations.

A series of misfortunes in the property sector

With Evergrande becoming the poster child of China’s unusual debt crisis in the property sector, a series of the country’s property developers have defaulted on their offshore debt obligations, causing incomplete homes, reducing investor confidence, and sales to go down in the world’s second-largest economy. Evergrande was China’s top-selling developer and slipped into a liquidity crisis in mid-2021.

Till then it accounted for a quarter of the economy. The crisis in the property sector also fueled the financial risk which could have a destabilizing impact on the economy that is already shattered by apathetic domestic consumption, increasing unemployment, faltering factory activity, and frail overseas demand. One of the major Chinese asset managers missed repayment obligations on some of the investment products, reports Reuters, and warned of a liquidity crisis. Country Garden, which is China’s largest private developer also flagged a liquid crunch recently. The crunching of the large players in the industry comes at a time when home sales, property investment, and new construction have shrunk for more than a year.

Morgan Stanley joined other major international brokerages in decreasing the prognosis for China’s economic growth in 2020; the firm now anticipates the nation’s Gross Domestic Product (GDP) to expand by 4.7%, a reduction from its previous forecast of 5%.

The Debt Restructuring Plan

In March, Evergrande unveiled its offshore debt restructuring strategy, anticipating a gradual revival of its operations and the generations of cash flow. At present, the company is actively seeking support from its creditors to finalize this process.

Later this month, Evergrande’s creditors are scheduled to vote on the proposed restructuring plan, potentially receiving approval from courts in Hong Kong and the British Virgin Islands during the initial week of September. In a significant move, an affiliated entity of the developer, Tianji Holdings, has submitted a request for Chapter 15 protection in the bankruptcy court situated in Manhattan.

According to the submission filed with the Manhattan bankruptcy court, Evergrande is in the process of seeking acknowledgment for its ongoing restructuring negotiations in various jurisdictions, including the Cayman Islands, Hong Kong, and the British Virgin Islands. As a part of its proceedings, the company has proposed the scheduling of a Chapter 15 recognition hearing, set to take place on September 20.

In a parallel occurrence last year, Modern Land (China) Co. Ltd, which is another Chinese developer, had also defaulted on the payments for its offshore bonds due in October 2021, leading to the filing of a Chapter 15 recognition petition under the bankruptcy code in New York. Trading of China Evergrande shares has been halted since March 2022. On Friday, the stock prices of Evergrande Services witnessed a sharp decline of over 12%, while China Evergrande New Energy Vehicle Group experienced an 8% drop.