China Evergrande Group, the troubled real estate developer that sparked a real estate crisis in China, has filed for bankruptcy after defaulting on its debt nearly two years ago. The company, along with two related business units, has requested Chapter 15 bankruptcy protection in New York as part of its efforts to restructure its $32 billion of foreign-held debt. This filing is crucial for Evergrande to resume normal operations and protect its U.S. assets from creditors. The company is aiming to secure the endorsement of three-quarters of its creditors for its restructuring plan, with hearings scheduled later this month in Hong Kong, the British Virgin Islands, and the Cayman Islands.
The bankruptcy filing comes after Evergrande’s default in December 2021 triggered a liquidity crisis in China’s real estate sector, leading to a decline in home prices and putting other struggling developers at risk of default. The crisis has also started to impact other sectors of the economy, including the banking sector, as more developers and institutions face financial strain. With the country already grappling with low consumer confidence and high youth unemployment, the real estate crisis is adding further pressure to China’s economic recovery from the COVID pandemic.
China Evergrande Group Files for Bankruptcy, Seeks Chapter 15 Protection
China Evergrande Group, the troubled real estate developer, has filed for bankruptcy after defaulting on its debt 20 months ago, which sparked a real estate crisis in China. Along with two related business units, Evergrande has requested Chapter 15 bankruptcy protection in a New York court. This filing is a necessary step for Evergrande to restructure its $32 billion of foreign-held debt and resume normal operations. Chapter 15 protection allows foreign companies to apply for U.S. bankruptcy protections for proceedings that primarily occur overseas, safeguarding the company’s U.S. assets from creditors disputing the restructuring.
To support its restructuring plan, Evergrande proposed offering its creditors new long-term bonds or a combination of shorter-term bonds and equity-linked instruments. These equity-linked instruments would be backed by shares in Evergrande or its property services and electric vehicle units, which are separately listed in Hong Kong. However, obtaining the agreement of three-quarters of its creditors is crucial for Evergrande. The company is already facing several lawsuits since defaulting on its debt in December 2021, including a winding-up petition in Hong Kong that, if successful, would liquidate its assets. The hearing for this petition is scheduled for October 30, following the outcome of Evergrande’s restructuring negotiations.
The real estate crisis initiated by Evergrande’s default has had widespread implications for China’s real estate sector. The uncertainty caused home prices to decline, putting additional pressure on struggling developers and increasing the risk of further defaults. Several other private developers have since defaulted on their offshore debt, including Country Garden, which recently missed an interest payment and is now warning of a potential $7.6 billion loss for the first half of this year. Evergrande itself has reported combined losses of $81 billion over 2021 and 2022, with $340 billion in liabilities at the end of 2022, including $85 billion in short-term borrowing.
The repercussions of the real estate crisis are now spreading to other sectors of the Chinese economy, including the banking sector. Zhongzhi Enterprise Group, a "shadow bank" with $138 billion of assets under management, has also missed several payments and is reportedly in the process of restructuring its debt. Home prices have continued to decline, falling 0.2% in July compared to June, according to official statistics. Private data even suggests more significant declines of at least 15% in major cities like Shanghai. State-owned developers are also feeling the impact, with 18 state-owned businesses warning of losses in the first half of this year, up from 11 last year and only four the year before. Consequently, the real estate crisis is weighing on China’s economy as it strives to recover from the COVID-19 pandemic, further exacerbating low consumer confidence and high youth unemployment.
In conclusion, China Evergrande Group’s filing for bankruptcy and request for Chapter 15 protection marks a significant development in the ongoing real estate crisis in China. The company’s efforts to restructure its debt and resume normal operations depend on obtaining the endorsement of its creditors, a critical step in the process. The crisis has had far-reaching consequences, impacting other developers, the banking sector, and the overall economy. The decline in home prices, coupled with low consumer confidence and high youth unemployment, poses further challenges for China’s economic recovery.
