(Jan 30): China Evergrande Group creditors are set to recover just a fraction of the billions of dollars worth of the builder’s debt they hold, with most of its assets likely hard to access for liquidators.

Almost all of Evergrande’s assets are in mainland China, presenting legal hurdles for non-Chinese administrators. The key Hong Kong holdings add up to just US$2.9 billion (RM13.7 billion) compared with US$25.4 billion in offshore liabilities as of the end of June 2022, according to a court document and Bloomberg’s calculations.

Creditors had sought to stave off the liquidation order through more than two years of negotiations with the world’s most-indebted developer, but that had failed to yield substantial progress. While the recovery prospects are bleak for offshore bondholders, what liquidator Alvarez & Marsal Inc does may serve as a template for Chinese developers as the historic property crisis drags on.

“The eventual winding-up of Evergrande is a lose-lose situation for the company and its creditors,” said Hansen Zhou, senior partner at Bohe & Hansen. “The Hong Kong court has pushed the company to propose multiple rounds of restructuring schemes before making a liquidation ruling, demonstrating sufficient professional patience and social responsibility.’

A deal would’ve been more in the interest of creditors, with an earlier analysis done by Deloitte estimating the recovery rate for the company’s notes at 3.4% on average in the event of a liquidation compared with 22.5% in a restructuring.

Evergrande’s key offshore assets include real estate properties in Hong Kong, an unsecured interest free loan of HK$2.07 billion advanced to China Ruyi Holdings Ltd and major stakes in Hong Kong-listed property services and new energy vehicle units, according to a court document following Monday’s winding-up order.

A prized tower in Hong Kong — the China Evergrande Centre in Wan Chai — has been seized by a lender, according to a September 2022 report. A land plot in the city’s Yuen Long area — where Evergrande had planned a residential project — was sold for US$637 million by receivers in 2022.

In both cases, creditors risked taking hefty losses in a bid to sell assets and recover the debt behind them.

A stock market slump has also shrunk the value of Evergrande’s stakes in China Evergrande New Energy Vehicle Group Ltd and Evergrande Property Services Group Ltd. The builder holds at least 50% stake in each of the subsidiaries, based on the latest filings, suggesting more than US$420 million in combined value as of Tuesday’s closing price.

The court document also showed 48.4 billion yuan worth of receivables were owed by Hong Kong subsidiaries, but the number was as of 2021 and didn’t show how the amount nets out against payables.

Deal collapsed

Offshore creditors had demanded controlling stakes in the two Hong Kong-listed companies, along with shares of the developer itself, as part of a restructuring deal. However, the company hadn’t presented a restructuring proposal, judge Linda Chan wrote Monday in her ruling, as she handed down the liquidation order.

A 2023 report showed dollar bond holders of Evergrande include Ashmore Group, Redwood Capital Management, Saba Capital Management and Ellington Management.

“Stakes in the two Hong Kong-listed units, especially the property management firm, could be among the best potential assets for offshore bondholders,” said Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities. “But whether creditors can tap them depends on negotiation between liquidators and Evergrande management.”

Overall, Evergrande has more than US$300 billion of liabilities set against total assets of US$242 billion.

Beyond reach

The reach of a Hong Kong-appointed liquidator into the indebted company’s assets in China is expected to be limited, given only courts in Shanghai, Shenzhen and Xiamen will recognise insolvency proceedings in the city as part of a 2021 deal.

Evergrande’s property development business includes more than 1,300 projects across 280 cities, according to the company’s website. Evergrande valued its property under development at 1.09 trillion yuan as of June last year, an interim report showed.

How much of that can be reserved for offshore creditors remains in doubt. Local Chinese governments and creditors have also been on the move to seize assets as the prospect of a government bailout dimmed.

Wuhan and Hainan seized plots of land in 2022. Trust firms that have lent billions of dollars to developers also rushed to salvage their loans. State-backed China Foreign Economy and Trade Trust Co and Minmetals International Trust Co took over the stakes of Evergrande’s two projects in Chengdu.

“Liquidations of this scale will often take several years to complete, and this time frame could be extended to a decade or more if the liquidators identify any legal actions against service providers of the company that they wish to pursue in their efforts to recover money for creditors,” said Nigel Trayers, managing director of restructuring at accounting firm Grant Thornton.