On Thursday (17 August), China's Evergrande Group initiated bankruptcy proceedings in New York to safeguard its United States assets from creditors, while it undertakes a restructuring process.
This move reflects mounting concerns about the debt burden carried by Chinese real estate developers and the potential repercussions of their financial struggles on the world's second-largest economy.
Evergrande sought refuge under Chapter 15 protection, a provision designed for cases of insolvency involving foreign entities and cross-border parties that are not based in the United States.
The company is concurrently pursuing restructuring efforts in Hong Kong and the Cayman Islands, as detailed in the filing.
Additionally, Evergrande's subsidiary, Tianji Holdings, also sought Chapter 15 protection with the New York Southern District bankruptcy court in Manhattan on the same day.
The filings were formally endorsed by Jimmy Fong, designated as the foreign representative for Evergrande. Despite this development, an attorney representing Evergrande was not immediately reachable for commentary.
The company has suggested a Chapter 15 recognition hearing scheduled for 20 September. The filing outlines a creditors' meeting slated for 23 August in Hong Kong, while the group recently deferred a meeting regarding offshore debt restructuring to 28 August.
The alignment or disparity between these two meetings remains unclear.
Notably, Evergrande, China's second-largest real estate developer, defaulted on its debt in 2021, instigating a property crisis that continues to impede China's economic progress. The company's financial woes led to losses amounting to $81 billion across 2021 and 2022.
In a previous development in March, Evergrande collaborated with a consortium of offshore creditors to devise a debt restructuring strategy. Additionally, Evergrande's electric vehicle subsidiary, New Energy Vehicle Group, divulged its restructuring blueprint this week, intending to cede a 28 per cent stake to Dubai-based automaker NWTN.
In China, the entire real estate market is similar to a ‘house of cards’, with local banks, local administrations, and the developers being the parts of the pyramid.
The fall of one is enough to usher in the collapse of the entire sector, and this is why Evergrande, one of the biggest real estate groups in the world, with liabilities in excess of $330 billion, came into picture.
Around $19 billion of it is owed in dollar bonds alone. In 2022 alone, bond payments in excess of $7 billion were due for the developer.
What complicates the case of the bondholders in the US further is the workaround Chinese companies have been employing for almost a decade now, also known as the Keepwell obligations.
Just as is the case with the variable interest entity structures with the stock market listings in the United States, the bond market equivalent is the Keepwell obligation, which is nothing but a word of promise from the borrower.
For offshore borrowing through bonds, a Chinese company’s offshore subsidiary raises money from foreign investors with the parent company in mainland China, otherwise not allowed to directly borrow from foreign investors, guarantees the financial backing and payment on the bonds issued.
Therefore, there is no formal guarantee from the parent company in mainland China on the bond, and in case of defaults, as is the case with Evergrande, there is no formal avenue or recourse available.
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