Evergrande: This will get out of hand and we'll be lucky to live through it

[Laxtonto 13257]

Evergrande will struggle to revive its debt restructuring plan

Spoiler

https://www.reuters.com/world/china/evergrande-will-struggle-revive-its-debt-restructuring-plan-2023-10-31/

 

HONG KONG, Oct 31 (Reuters) - China Evergrande (3333.HK) is trying to stave off liquidation by revising its debt restructuring plan, but its biggest challenge will be convincing its creditors, and shareholders in two of its units, that the proposal is worth their while.

A Hong Kong court on Monday gave Evergrande, the world's most indebted property developer, a five week reprieve to come up with a deal. The company, which has more than $300 billion of liabilities, defaulted on its offshore debt in late 2021 and became the poster child of a debt crisis that has since engulfed China's property sector.

 

Evergrande's lawyer said the company was working on a revised plan to "monetise the value" of its two Hong Kong-listed units - Evergrande Property Services Group (6666.HK) and Evergrande New Energy Vehicle Group (NEV) (0708.HK).

Sources familiar with the matter told Reuters that plan included allowing Evergrande creditors to swap their debt into equity and bonds tied to these units.

Evergrande, Evergrande Property Services and Evergrande NEV declined to comment.

 

For the plan to proceed, shareholders in both units will need to approve issuing new bonds and a large volume of new shares, a feat restructuring experts said would be time-consuming and difficult to achieve.

"Any process to issue new debt would need to take account of the interests of the other shareholders in those subsidiaries," said Mat Ng, a managing director specialising in restructuring at Grant Thornton Hong Kong.

 

"Why would those shareholders want to see new debt issued to replace the existing debt issued by Evergrande, what is the benefit for them?"

The convertible bonds and equity-linked notes to be issued by these listed units could also be subject to Chinese regulatory approval, industry experts said, even though Evergrande's lawyer told the court these notes faced no regulatory hurdles.

Evergrande's initial $23 billion offshore debt restructuring plan was thrown off course last month when its billionaire founder Hui Ka Yan was confirmed to be under investigation for suspected criminal activities.

 

Due to an investigation into its flagship property unit, Evergrande was barred by mainland regulators from issuing new dollar bonds, a crucial part of the restructuring. That original plan had also offered options including equity-linked instruments backed by Evergrande and the two listed units.

But even before the plan was derailed by the investigations, some creditors were having a hard time accepting it.

Evergrande did not get the 75% of votes required in one of its debt classes to pass the restructuring terms, five sources with knowledge of the matter told Reuters. These Class C creditors include private lenders holding equity in projects as collateral. Some Chinese banks and pre-IPO investors in this class also vetoed the proposal.

Some Class C creditors told Reuters they vetoed the terms because they were not treated fairly by being offered fewer shares in the property services unit than public bondholders who are in the other creditor class.

"We hold collaterals, which will help us realize value even if Evergrande is liquidated," said a Class C creditor, who expected a better recovery rate for his debt than the bondholders.

Evergrande has been focusing on negotiating with a major group of bondholders, and had gained their support for the initial restructuring deal. But now they are also unhappy with the revised terms, three people familiar with the matter said.

"As the judge said in court, a winding-up may be better for us because a restructuring carried out by a liquidator would treat all creditors fairly," said another Class C creditor. Both creditors declined to be named as they were not authorised to speak to media.

 

Quote

 

China Evergrande (3333.HK) is trying to stave off liquidation by revising its debt restructuring plan, but its biggest challenge will be convincing its creditors, and shareholders in two of its units, that the proposal is worth their while.

A Hong Kong court on Monday gave Evergrande, the world's most indebted property developer, a five week reprieve to come up with a deal. The company, which has more than $300 billion of liabilities, defaulted on its offshore debt in late 2021 and became the poster child of a debt crisis that has since engulfed China's property sector.

 

So the first deal fell apart and they are giving them one last chance before liquidation. Liquidation would be an abject disaster and the potential for this to domino is a major concern.

[Parliament 14593]

So I can finally afford that condo in Wuhan?

[tbone_ 14438]

Yes but they will lock you inside

[Telegraph_it 3379]

3 minutes ago, tbone_ said:

Yes but they will weld you inside

Fixed it for you. 

[Rudiger 1181]

Joke’s on you both. There won’t be any contractors to weld you inside because they know they won’t get paid. 

[UT_OB1 2266]

With or without my family?

[Captainant 28507]

2 hours ago, Parliament said:

So I can finally afford that condo in Wuhan?

only for 99 years

[WBT 20965]

China is so fucked

[Laxtonto 13257]

HK court orders China Evergrande to liquidate with debts of $300 bln

Spoiler

HONG KONG, Jan 29 (Reuters) - A Hong Kong court on Monday ordered the liquidation of property giant China Evergrande Group (3333.HK)

, opens new tabA move likely to send ripples through China's crumbling financial markets as policymakers scramble to contain a deepening crisis.

Justice Linda Chan decided to liquidate the world's most indebted developer, with more than $300 billion of total liabilities, after noting Evergrande had been unable to offer a concrete restructuring plan more than two years after defaulting on a bond repayment and after several court hearings.

 

"It is time for the court to say enough is enough," said Chan, who will give her detailed reasoning later on Monday.

Evergrande chief executive Siu Shawn told Chinese media the company will ensure home building projects will still be delivered despite the liquidation order. The order would not affect the operations of Evergrande's onshore and offshore units, he added.

The decision sets the stage for what is expected to be drawn-out and complicated process with potential political considerations, given the many authorities involved. Offshore investors will be focused on how Chinese authorities treat foreign creditors when a company fails.

 

"It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande's daily operations even harder," said Gary Ng, senior economist at Natixis. "As most of Evergrande's assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders, and situation can be even worse for shareholders."

 

Evergrande's shares were trading down as much as 20% before the hearing. Trading was halted in China Evergrande and its listed subsidiaries China Evergrande New Energy Vehicle Group (0708.HK)

, opens new tab and Evergrande Property Services (6666.HK), opens new tab after the verdict.

COMPLICATED PROCESS

Evergrande, which has $240 billion of assets, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021 and the liquidation ruling will likely further jolt already fragile Chinese capital and property markets.

 

Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows, so any fresh jolt to investor confidence could further undermine policymakers' efforts to rejuvenate growth.

Evergrande applied for another adjournment on Monday as its lawyer said it had made "some progress" on the restructuring proposal. In the latest offer, the developer proposed creditors swap their debts into all the shares the company holds in its two Hong Kong units, compared to stakes of about 30% in the subsidiaries ahead of the last hearing in December.

Evergrande's lawyer argued liquidation could harm the operations of the company, and its property management and electric vehicle units, which would in turn hurt the group's ability to repay all creditors.

Evergrande had been working on a $23 billion debt revamp plan with a group of creditors known as the ad hoc bondholder group for almost two years.

"We're not surprised by the outcome and it's a product of the company failing to engage with the ad hoc group," said Fergus Saurin, a Kirkland & Ellis partner who had advised the offshore bondholders. "There has been a history of last minute engagement which has gone nowhere. And in the circumstances, the company only has itself to blame for being wound up."

Evergrande cited a Deloitte analysis during a Hong Kong court hearing in July that estimated a recovery rate of 3.4% if the developer were liquidated. After Evergrande said in September its flagship unit and its chairman Hui Ka Yan were being investigated by the authorities for unspecified crimes, creditors now expect a recovery rate of less than 3%.

The ruling is expected to have little impact on the company's operations including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China - a different jurisdiction from Hong Kong.

The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.

Before Monday, at least three Chinese developers have been ordered by a Hong Kong court to liquidate since the current debt crisis unfolded in mid-2021.

https://www.reuters.com/business/embattled-china-evergrande-back-court-liquidation-hearing-2024-01-28/

Edited January 29 by Laxtonto

[Parliament 14593]

creditors now expect a recovery rate of less than 3%.

[Laxtonto 13257]

This is a long ass time coming. I am curious how much has the Chinese government pumped into Evergrande to keep it propped up this long?

[Nice Guy Eddie 13725]

Isn't there a situation where many Chinese citizens have invested in multiple (empty) properties? As a group are they effectively looking at a 97% loss on their investments?

And when describing "many Chinese citizens" that's probably like describing the population of the US.

[elfenix 34744]

30 minutes ago, Nice Guy Eddie said:

Isn't there a situation where many Chinese citizens have invested in multiple (empty) properties? As a group are they effectively looking at a 97% loss on their investments?

And when describing "many Chinese citizens" that's probably like describing the population of the US.

if you're 1 in a million there's 8 of you in houston or dfw, 30 of you in texas, and 1,412 of you in china.

[Parliament 14593]

1 hour ago, Nice Guy Eddie said:

Isn't there a situation where many Chinese citizens have invested in multiple (empty) properties? As a group are they effectively looking at a 97% loss on their investments?

If bankruptcy in China works like it does in the US, creditors pick over the bones before investors.  And if we’re looking at a 3% recovery I can’t imagine investors will get anything.

[Nice Guy Eddie 13725]

42 minutes ago, Parliament said:

If bankruptcy in China works like it does in the US, creditors pick over the bones before investors.  And if we’re looking at a 3% recovery I can’t imagine investors will get anything.

I didn't necessary think these investors owned Evergrande or where they actually owned property units in the hopes of a future appreciation/sale. However if Evergrande has failed, you would think that is a sign that property across the board has taken some massive hits.

[Laxtonto 13257]

Here's what to know about the collapse of China's Evergrande property developer

Spoiler

A Hong Kong court has ordered the liquidation of the Evergrande Group, China's giant and massively indebted real estate developer, after the company was unable to restructure the $300 billion it owed investors.

Just six years ago, Evergrande was riding high, preselling apartments to middle- and upper-income Chinese. In 2018, it was listed as the world's most valuable real estate company. But just three years later, it was on the financial ropes. Massively overleveraged and unable to complete some existing projects, Evergrande has become symbolic of a Chinese economy that faces some major near-term obstacles: slowing growth, increasing debt and a shrinking workforce.

 

Planet Money

China's real estate crisis, explained

Evergrande had been seeking a $23 billion debt restructuring plan, but that fell apart last year when the company's billionaire CEO, Hui Ka Yan, also known as Xu Jiayin — once one of Asia's richest people — came under investigation for unspecified criminal behavior.

China invests roughly 20% to 30% of gross domestic product annually in the economy's property and infrastructure sectors.

Although Evergrande's demise is unlikely to have an immediate impact on U.S. consumers, it is yet another indicator that China's economy — which makes up about 20% of the world's GDP — is undergoing a painful period of slowdown, and that could result in slower global growth down the road.

Here are some things to know:

Evergrande's collapse is a big deal, but it's not another Lehman Brothers

Some are already comparing Evergrande's likely demise to the 2008 collapse of Lehman Brothers, which presaged the Great Recession. The financial giant Lehman filed for bankruptcy on Sept. 15, 2008, with $613 billion in debt, triggering a banking meltdown that sent the already recessionary U.S. economy into a tailspin.

The dramatic fall of Lehman was due in large part to millions of risky mortgages propping up an unstable financial system. Homebuyers with mortgage payments they couldn't afford defaulted on their loans, sending shock waves through Wall Street and leaving those borrowers vulnerable to foreclosure.

 

But the experts who spoke with NPR don't think the global economy is exposed to that extent.

Evergrande has been on a slow burn to insolvency since at least 2020, when the Chinese government launched a program, known as the "three red lines," aimed at deleveraging the real estate market. Recognizing that this sector was overheated, Beijing placed restrictions on how much it could borrow.

World

The Evergrande Group's Debt Issues Could Be A Drag On China's Economy

"It worked," says Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana. "Evergrande has been the biggest victim of that policy."

But parallels with the collapse of Lehman, which was carrying $613 billion in debt (in 2008 dollars), are "a bit of an overstatement," says Roberts, who is also a senior fellow at the Atlantic Council's Global China Hub and the author of The Myth of Chinese Capitalism: The Worker, the Factory, and the Future of the World.

He calls the company's demise "a controlled implosion."

"China has known for a long time that their economy was imbalanced and too reliant on debt, with the real estate sector the most indebted industry of all and Evergrande the poster child for the most indebted company in that sector."

Scott Kennedy, senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies, agrees that Evergrande's collapse should come as no surprise to its investors or to the rest of the world.

He says that Evergrande's business model, like that of other real estate developers in China, is pre-sold housing — an inherently risky strategy. It has led hundreds of thousands of Chinese to buy homes that now have no timeline — and perhaps no hope — of ever being completed.

"At some point, you may not be able to actually complete all of that housing. ... Eventually projects get bogged down and your financing situation gets worse," Kennedy says.

 

Many ordinary Chinese are seeing their real estate investments evaporate

Chinese households have 70% or more of their asset wealth in their apartments. Evergrande's collapse, although long anticipated, comes as a blow to some, says Roberts.

Another smaller Chinese property developer, Country Garden, also recently got in trouble.

"They're very worried. They're seeing their one big asset depreciating," he says.

Planet Money

5 Lessons Evergrande Taught Us About The Chinese Economy

"They own their apartment, and in some cases more than one," he says. "When the property market is doing as badly as it's doing in China ... there's sort of a negative wealth effect for consumers and they don't want to spend."

The drawn-out liquidation of Evergrande means ordinary investors who just wanted to buy an apartment and larger institutional investors "are going to need to stand in line, and the courts are going to have to figure out who is going to be at the head of that line and get paid," Kennedy says.

It's unlikely to have much immediate impact on U.S. consumers

Diana Choyleva, a senior fellow on China's economy at the Asia Society, says Evergrande's investors — both foreign and domestic — will see the biggest impact from Monday's ruling in Hong Kong.

"This is more of an outside investor focus," she says.

So U.S. consumers are unlikely to see much impact, at least in the short term. The time horizon to wind down Evergrande could take a while too, further mitigating its impact, she says.

While the Evergrande case was brought in Hong Kong because that's where the company's shares are listed, Choyleva says that Guangzhou, where Evergrande is based, "is not one of the three Chinese cities that mutually recognize liquidation orders," she says.

"So the liquidator could find it hard to take control of Evergrande subsidiaries in mainland China," she says. The process of liquidating the company "will be protracted."

 

Evergrande indicates a broader concern about China's economy that may be far-reaching

Beijing has come to recognize that an export-led economy on the scale that China has built in recent decades cannot go on forever, and it has tried to promote more domestic consumption to take up some of the slack.

However, the implosion of Evergrande could prove a blow to confidence both inside and outside China, Kennedy says. "There is the confidence about the company itself and the financial problems that it's gotten into and what that means for the real estate sector," he says.

"The next is what is people's confidence in the Chinese government's ability to manage this process in a fair, dispassionate, objective way," he says.

China's slow lurch back from COVID

A year after China ended its harsh COVID policies, it's struggling to rebound

Choyleva and others see the potential for deflation ahead as the Chinese economy struggles with a number of issues going forward. In November, consumer prices in China fell at their fastest rate in three years.

China "should be on American's radar because, first of all, China is a huge economy," she says. "If China is having severe deflation at home, pretty much the only choice left would be [for it] to export deflation."

At first glance, that would seem to benefit consumers buying Chinese-made goods. Instead, it's more likely to mean that U.S.-based competitors will need to lower their prices to compete with a flood of ever-cheaper Chinese products.

"That translates into businesses closing, jobs being lost and consumers being worse off," Choyleva says.

Roberts sees similar concerns. The U.S. and China, he says, "are deeply entwined," and most top U.S. multinationals "secure a significant portion of their revenues and profits from the China market or their supply chains start there."

Meanwhile, China is pumping money into manufacturing to try to offset its slowing economy.

"Ultimately, [China] is going to be producing a lot of goods that they need to sell somewhere, and they're going to be selling them on the cheap. So I would imagine [that] could be a deflationary force."

 

https://www.npr.org/2024/01/30/1227554424/evergrande-china-real-estate-economy-property-collapse

[Laxtonto 13257]

For those that need a simple primer on all of this and why it is a mess regardless the outcome

 

 

[nbmishoid 989]

On 1/29/2024 at 7:24 AM, Nice Guy Eddie said:

Isn't there a situation where many Chinese citizens have invested in multiple (empty) properties? As a group are they effectively looking at a 97% loss on their investments?

And when describing "many Chinese citizens" that's probably like describing the population of the US.

20,000 apartments paid for but not delivered 

[swraith 348]

Evergrande liquidation: Western hedge funds shocked by liquidation | Fortune

[Captainant 28507]

2 minutes ago, swraith said:

Evergrande liquidation: Western hedge funds shocked by liquidation | Fortune

[Parliament 14593]

10 hours ago, swraith said:

Evergrande liquidation: Western hedge funds shocked by liquidation | Fortune

...a Hong Kong court has ordered Evergrande’s liquidation, and the bonds are nearly worthless, trading in secondary markets at just 1 cent on the dollar.

Wally!  WHAT DID YOU DO?!

[Boss Hogg 808]

 

[Parliament 14593]

Ah...restrict withdrawal.  No better way to boost confidence.

[statsman 5691]

“What Adam Smith called ‘the invisible hand’ of market choices drives greater economic growth than centrally controlled and directed economies.”

Does anyone on this board disagree with this? Personally, I don’t; the truth of the statement seems obvious  

How funny that the PRC is leaning into central economic control and direction as a tool to spur greater growth. (Of course, most governments around the world try, to varying extents, to direct growth through central planning, despite its shortfalls). 
 
I also think their history of economic growth may be credited to some strong demographic policies, as well as the opening of markets started after Mao. They spent a few decades enforcing a one-child policy, which (given the traditional nature of Chinese society, where children care for parents) really forced women to pursue careers. Now, with an aging population and reduced birth rate, they’re kind of double screwed. 

[Captainant 28507]

Just now, statsman said:

“What Adam Smith called ‘the invisible hand’ of market choices drives greater economic growth than centrally controlled and directed economies.”

Does anyone on this board disagree with this? Personally, I don’t; the truth of the statement seems obvious  

I don't disagree, but I'm inferring from your post that you think we in America DO NOT have a centrally controlled and directed economy? There is such an incredible degree of corporate welfare that goes on that we very much do have chosen winners and losers in our system.

The invisible hand of the market was no match for "too big to fail" and "number go up"

[statsman 5691]

4 minutes ago, Captainant said:

I don't disagree, but I'm inferring from your post that you think we in America DO NOT have a centrally controlled and directed economy? There is such an incredible degree of corporate welfare that goes on that we very much do have chosen winners and losers in our system.

The invisible hand of the market was no match for "too big to fail" and "number go up"

I think there are degrees of freedom and regulation in markets. Frankly, there’s a lot of evidence that enforced transparency in markets make them more efficient and productive (people prefer to invest in markets with enforced “fairness”); that’s good regulation. 
 
No nation has totally free and undirected economies. It’s a spectrum, and nations can move in either direction, but one direction usually leads to greater economic growth. (That’s not the direction the PRC is choosing). 

Edited March 5 by statsman

[Captainant 28507]

BBC: China property giant and founder accused of $78Bn fraud

[Wally Fairway 5674]

1 hour ago, Captainant said:

BBC: China property giant and founder accused of $78Bn fraud

Some people are just going to disappear in China as they deal with this issue; unlike here where the likes of Dick Fund (Lehman), Hank Greenberg (AIG), Kathleen Corbet (Std & Poors) and many more just walked away with the millions (billions) that they had already made. 

[Captainant 28507]

5 minutes ago, Wally Fairway said:

Some people are just going to disappear in China as they deal with this issue; unlike here where the likes of Dick Fund (Lehman), Hank Greenberg (AIG), Kathleen Corbet (Std & Poors) and many more just walked away with the millions (billions) that they had already made. 

The irony is that HK banned a dude from their exchange in 2012 for saying this exact thing

Quote

 

But instead of being heralded for his foresight, Left ended up being busted by Hong Kong’s securities regulator for claiming, in a 2012 report, that the company engaged in aggressive accounting and was actually insolvent.

“They deemed my report to be reckless. That was the word they used: reckless and negligent for spreading false information,” Left told Institutional Investor.

Left’s battle with Hong Kong regulators, a civil case, lasted seven years and cost him millions of dollars in legal fees. “They wouldn’t even let me question the company,” he recalled. “I said, ‘Well, you can question me. Here’s everything. Could I get some things to prove that I’m right?’ Because I needed some information.”

 

 

Edited March 19 by Captainant
Put large text in quote

[Parliament 14593]

For perspective, Worldcom’s fraud was $3.8B. Or $11B depending on how you look at it.

https://en.wikipedia.org/wiki/WorldCom_scandal
 

 

[Captainant 28507]

47 minutes ago, Parliament said:

For perspective, Worldcom’s fraud was $3.8B. Or $11B depending on how you look at it.

https://en.wikipedia.org/wiki/WorldCom_scandal
 

 

Yeah, the relative proportion of WorldCom to the US economy is much smaller than Evergrande to China's. If this thing comes all the way unraveled it's gonna be a pretty major adjustment 

[Firemans4Horn 18528]

As someone that has travelled extensively through the BRICS+ nations they all are pretty fucked up. I’d rather invest in VTI.