Developer China Evergrande ordered to liquidate. What will the impact be?

A Hong Kong court on Monday ordered China Evergrande, the world’s most indebted developer, to be liquidated.

The move could send shockwaves through already fragile Chinese capital and property markets. Such a process could be complicated, with potential political considerations, given the many authorities involved.

Once a liquidation order is issued, a provisional liquidator and then an official liquidator will be appointed to take control and prepare to sell the developer’s assets to repay its debts.

The liquidators could propose a new debt restructuring plan to offshore creditors holding US$23 billion of debt in Evergrande if they determine the company had enough assets or if a white knight investor appeared. They would also investigate the company’s affairs and could refer any suspected misconduct by directors to Hong Kong prosecutors.

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Evergrande could appeal a liquidation order, but the liquidation process would proceed pending appeal.

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Shares in Evergrande and its listed subsidiaries were suspended from trading after the liquidation order. Listing rules require a company to demonstrate a business structure with sufficient operations and asset values.

Evergrande cited a Deloitte analysis during a Hong Kong court hearing in July that estimated a recovery rate of 3.4 per cent if the developer were liquidated.

However, 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 three per cent.

Evergrande’s dollar bonds were bid at around one cent on the dollar on Friday.

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Most of Evergrande’s assets have been sold or seized by creditors, leaving its two units listed in Hong Kong – Evergrande Property Services Group and Evergrande New Energy Vehicle Group. Their combined market capitalisation had dropped to US$973 million as of Friday.

A liquidator could sell Evergrande’s holdings in the two units although it might be difficult to find buyers.

After a liquidation, the liquidator could take control of Evergrande’s subsidiaries across mainland China by replacing their legal representatives one by one, a process that could take months or years.

Insolvency experts said it would be a challenge for the liquidator to change the representatives as Guangzhou, where Evergrande is based, is not one of the three Chinese cities that mutually recognize liquidation orders with Hong Kong.

Even if a liquidator were to take possession of the units that have onshore projects, many of these have already been taken over by creditors, frozen by courts, have little value left or are even in negative equity because of falling property prices.

While a winding-up of the developer with US$240 billion of assets would send shockwaves through already fragile capital markets, experts said it would not offer a blueprint on how liquidation might unfold for other embattled developers.

Given the sheer size of Evergrande’s projects and debt, the process would involve many authorities and political considerations.

Completing ongoing home construction projects will be a top priority for the company, the sector and the government.