Evergrande files for Chapter 15 bankruptcy in the US

December 2023 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

December 2023 Issue

China Evergrande, the heavily indebted Chinese property developer, filed for Chapter 15 bankruptcy protection in the US.

In mid-August, the company and its affiliate Tianji Holdings filed for Chapter 15 protection in the US Bankruptcy Court for the Southern District of New York in Manhattan, seeking recognition of foreign restructuring proceedings in the High Court of Hong Kong and in the High Court of the Eastern Caribbean Supreme Court in the British Virgin Islands.

The filing is the largest of its kind in 2023. Chapter 15 of the US bankruptcy code shields non-US companies that are undergoing restructurings from creditors that hope to sue them or tie up assets in the US.

Through the filing, Evergrande sought to have the schemes of arrangement it is pursuing in Hong Kong and the British Virgin Islands recognised and given effect in the US. Scheme creditors were scheduled to vote on the Hong Kong scheme on 28 August 2023, however those meetings were postponed to 25-26 September 2023 to allow the creditors more time to consider, understand and evaluate the proposals.

The company was at pains to point out that the filing was strictly related to its offshore debt restructuring and had not filed a bankruptcy petition, which is a formal declaration that a company cannot pay its debts. The Chapter 15 filing is a “normal” part of offshore restructuring, it said in a filing to the Hong Kong Stock Exchange.

Despite Evergrande’s insistence that the filing is nothing out of the ordinary, concerns are mounting around the future of the company, which is attempting to undertake the world’s biggest debt restructuring. Indeed, Evergrande’s offshore debt restructuring involves a total of $31.7bn, comprised of bonds, collateral and repurchase obligations.

Evergrande’s financial difficulties began when the developer faced a liquidity crunch in 2021. It first defaulted on an offshore dollar bond in December of that year. The company had had $300bn worth of liabilities when troubles first began and saw them balloon to about $340bn by the end of 2022.

In 2022, Evergrande posted a net loss of 105.91bn yuan, or $14.5bn, in 2022, compared with a loss of 476.04bn yuan in 2021, according to results filed with the Hong Kong Stock Exchange in July. Since the second half of 2021, Evergrande’s real estate transaction volumes, area sold and amount of sales have declined, leading to reduced cash generation and challenges accessing external capital. Amid all of the uncertainty surrounding Evergrande, trading in the company’s shares was suspended in March 2022.

Of late, an increasing number of Chinese property developers have defaulted on their offshore debt obligations, leaving unfinished homes and unpaid suppliers, shattering consumer confidence. These difficulties have increased concerns that uncertainty in the Chinese property space may spread to the wider financial system, which could have a destabilising impact on the Chinese economy. The Chinese real estate sector, along with related industries, contributes as much as 30 percent to the country’s GDP.

Since mid-2021, companies accounting for 40 percent of Chinese home sales have defaulted, most of them private property developers. In August, Country Garden, China’s biggest private-sector developer by sales, missed interest payments on two US-dollar-denominated bonds. Major Chinese trust company Zhongrong International has also missed repayments on dozens of investment products since late July.

Following Evergrande’s Chapter 15 filing, the company announced that its chairman, Hui Ka Yan, had been subjected to “mandatory measures in accordance with the law due to suspicion of illegal crimes”. Earlier in September, employees of Evergrande’s wealth management subsidiary were also detained, according to police in Shenzhen.

Richard Summerfield