China Evergrande: Hong Kong court adjourns winding-up hearing to December 4, signals last reprieve for developer to sort out its debt
- Petition in Hong Kong had earlier been adjourned five times while Evergrande worked out a plan to reorganise US$20 billion of defaulted debt with creditors
- Evergrande sought to revise the restructuring deal last month after home sales underwhelmed and its founder Hui Ka-yan was detained
The next hearing will be on December 4, giving the Guangzhou-based developer five weeks to get its house in order and stave off liquidation, Justice Linda Chan said in a decision today. The High Court judge also warned it is “highly likely” to grant a winding-up order, if no restructuring plan is forthcoming by then.
Justice Chan said the “final adjournment” would give more time for Evergrande to cobble together a deal that would offer higher returns to creditors than in the case of liquidation. She added that the developer had consumed too much time over the past 17 months on its negotiations with creditors.
The stock slipped 9.3 per cent to HK$0.21 on Monday in Hong Kong, after earlier plummeting as much as 23 per cent to a 52-week low of HK$0.182. It has crashed 99 per cent from the peak in 2021, erasing HK$225 billion of its market value.
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The winding-up petition was filed in June 2022 by Top Shine Global Limited, an offshore entity which the troubled Chinese developer said was beneficially owned by businessman Lin Ho-man.
Top Shine and Lin’s other private vehicle Triumph Roc International took legal action to recover more than HK$1.72 billion (US$220.5 million) of investment in a scheme involving Fangchebao, Evergrande’s online property and auto platform, in March 2021. The deal failed after the developer fell into financial distress six months later.
Evergrande hired outside financial and legal advisers in September 2021 to reassess its cash flow and liquidity crisis, and began reneging on its offshore debt obligations in December that year. Since then, its total liabilities ballooned by 22 per cent to 2.4 trillion yuan (US$328.8 billion).
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At today’s hearing, lawyers at K.B. Chau & Co representing Top Shine asked the High Court for an immediate order to fold up the developer. Kirkland & Ellis, the legal adviser to an ad hoc group of offshore creditors and an interested party in the hearing, asked for a three-month delay.
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“We think the company really has this last chance now to put forward a viable proposal that is acceptable to my clients,” said Neil McDonald, a partner of Kirkland & Ellis, whose group holds more than US$6 billion of claims against Evergrande. “We hope the company understands the very clear message that this is the last chance.”
“We need to do that immediately, without any delay, and the company needs to be prepared to show willingness to come up with solutions that might overcome these hurdles,” McDonald added.
Today’s hearing followed five adjournments since the June 2022 petition, while China Evergrande thrashed out a scheme to reorganise US$20 billion of defaulted debt with offshore creditors. That scheme unravelled in the home stretch last month, after the developer said home sales trailed forecasts, and its founder and chairman Hui Ka-yan was detained for unspecified crimes.
Other troubles at its onshore unit Hengda Real Estate, which is being investigated for disclosure failures, crippled Evergrande’s ability to issue new bonds to offshore creditors as part of its restructuring. The developer has since asked to revise the restructuring terms previously agreed with creditors in April this year.
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“This is last-chance saloon, as it appears the old deal is firmly off the table now,” said Jonathan Leitch, a restructuring lawyer in Hong Kong at Hogan Lovells. “A liquidation would be slow and costly and liquidators appointed in Hong Kong would encounter significant difficulties undertaking their role and gaining onshore access to assets, books and records and other key information.”
Liquidators would likely take control of a company with almost zero cash at bank and may well need to raise funding to pay for legal action to secure control of assets, Leitch added. “It could be a long time before offshore creditors have a clear view on whether they have any prospect of receiving anything back.”
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Offshore creditors may be able to recover 9.73 billion yuan, assuming the developer is forced into liquidation, according to the worst-case analysis by Deloitte Advisory (Hong Kong), based on 80 per cent of Evergrande’s net asset value as of November 2022. That equals to about 2.05 cents to 3.53 cents for every dollar owed. Evergrande’s unsecured creditors may get 5.92 cents to 9.34 cents per dollar.
The adjournment at today’s hearing was the most likely outcome, given the size, complexity and significance of the situation at China Evergrande, according to restructuring lawyers in Hong Kong at Akin Gump Strauss Hauer & Feld. This is clearly the final chance, unless Evergrande has a revised restructuring support agreement in place by December 4, they said.
“This is consistent with the court’s more stringent recent approach to petition adjournments,” partner Daniel Cohen and counsel Jeremy Haywood said by email. The upshot is that, without a deal on the table or support of key creditors, “it is likely that Evergrande will be wound up,” they added.
Additional reporting by Li Jiaxing
