China Evergrande was finally liquidated, and international creditors came to the mainland to grab food?

Source: Fengcai News

出品 | 凤凰网风财讯fengcaixun

Author | Wang Tingting

On January 29, the debt restructuring case of China Evergrande, which had been in the air for more than a year, finally ended in "liquidation". At 9:30, according to CCTV news, the Hong Kong court has issued a winding-up order to China Evergrande.

Liquidation is a legal process of disposing of a company's assets, in which the liquidator sorts out the company's assets and debts, realizes the assets, and distributes the assets according to the priority of the creditor's rights in accordance with the law to repay the company's debts.

However, there has always been a huge question in the market about the formal promulgation of the winding-up order: will the winding-up order of the Hong Kong court involve the enforcement of the mainland? After all, the vast majority of Evergrande's assets are in the mainland.

At 10 a.m. on 29 January, the Supreme People's Court and the Department of Justice of the Government of the Hong Kong Special Administrative Region jointly announced in Hong Kong that the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region signed by the Supreme People's Court and the Department of Justice of the Government of the Hong Kong Special Administrative Region in Beijing on 18 January 2019 will come into effect in both places today.

This also caused many netizens to argue: Can Evergrande's foreign investors really go to the mainland to "grab food"?

Dispute: Hong Kong Liquidation and Mainland Enforcement?

On January 29, according to the official website of the Hong Kong judiciary, the Hong Kong court at 9:30 and 14:30 against China Evergrande (03333. HK) and a regulatory order were heard separately. Eventually, the Hong Kong court formally issued a winding-up order against China Evergrande (a Hong Kong listed company).

"Liquidation is to be expected, and these problems are well known. Some overseas investors bluntly said that what they are most concerned about now is whether the mainland will recognize the Hong Kong court's ruling and allow international creditors to seize Evergrande's assets.

On January 29, Sean, CEO of Evergrande Group, responded to the media and said, "I want to emphasize that the subject involved in the overseas liquidation order issued by the court this time is China Evergrande (03333. HK）。 At present, the management and operation system of Evergrande Group and other domestic and foreign subsidiaries as independent legal entities remain unchanged, and the Group will continue to do everything possible to ensure the stability of domestic business and operation, steadily promote key tasks such as ensuring the delivery of buildings, maintain the quality of property services, and will still make every effort to ensure the smooth progress of risk resolution and asset disposal, and will still try its best to promote various tasks fairly in accordance with the law. ”

But this response is constantly debated in the industry.

GARY NG, SENIOR ECONOMIST AT SNATIXIS, POINTED OUT THAT SINCE MOST OF EVERGRANDE'S ASSETS ARE IN Chinese MAINLAND, THERE IS UNCERTAINTY ABOUT HOW THE DEBTORS WILL SEIZE THE ASSETS, AND THE ORDER OF REPAYMENT OF THE DEBTS OF FOREIGN CREDITOR HOLDERS, AND THE SITUATION OF SHAREHOLDERS (HONG KONG LISTED COMPANIES OF CHINA EVERGRANDE) MAY BE WORSE.

And the liquidation is the beginning of a long liquidation process, and Evergrande's daily operations will be more difficult. Investors should also pay attention to whether Evergrande's liquidation will have a snowball effect, because the cost of liquidation is long-term.

"Regardless of who is appointed as the liquidator, the liquidation event will be unfavorable to Evergrande investors. The liquidator will divest the company's assets as soon as possible, and the realisation price can be very bad. In the end, the proportion of bankruptcy repayment that creditors can get may be very low. Some Hong Kong institutions said bluntly to Fengcai News.

In particular, the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region came into effect on 29 January, which is noteworthy in both places.

Si Yanli, deputy director of the Research Office of the Supreme People's Court, told the media, "This is the ninth judicial assistance document that has come into effect between the two places, and it is also the arrangement with the widest coverage and the most significant significance. After the Arrangement comes into effect, it is expected that about 90% of the judgments of the courts of the two places in civil and commercial cases will be mutually recognized and enforced. ”

It is worth noting that, according to Article 3 of the Arrangement, the Arrangement does not apply to the judgments of eight types of civil and commercial cases, including bankruptcy (winding-up) cases.

An expert familiar with the legal situation told Phoenix Net Financial News that the exclusion of bankruptcy and liquidation cases from the "Arrangement" will add uncertainty to the relevant handling of Evergrande's liquidation. Since 2019, the courts in Shenzhen, Shanghai and Xiamen have successively recognised Hong Kong bankruptcy orders, and the mainland courts can decide on their own. The dispute over Evergrande is also extremely complex, and the enforcement of security in respect of rights and interests disputes, breach of contract and escape, cross-border enforcement, etc., are regarded as ordinary disputes, and are applicable to the Arrangement, which may be able to be enforced in the Mainland without barriers. Therefore, in the end, it will depend on how the mainland courts decide.

Wang Yuchen, director of Beijing Jinsu Law Firm, also told Phoenix Net Wind Financial News that Hong Kong winding-up orders usually only apply to companies registered in Hong Kong or companies with operations in Hong Kong, and Evergrande's assets in Chinese mainland usually need to be disposed of in accordance with Chinese mainland laws and procedures. However, the liquidation proceedings in Hong Kong may have an impact on the overall financial position and asset disposal strategy of Evergrande Group, and thus indirectly affect the disposal of assets in the Mainland.

"The winding-up proceedings may result in the freezing of Evergrande Group's assets, and the liquidation proceedings usually give priority to the realization of creditors' claims, which may lead to greater tension on the limited funds in the hands of Evergrande Group, which in turn may affect the construction and completion of Evergrande's projects in the mainland, thereby negatively affecting the interests of owners of unfinished properties. Wang Yuchen pointed out that if the winding-up order causes a negative reaction to the mainland real estate, it may cause the relevant departments to intervene and pay attention to protect the rights and interests of the owners of unfinished properties.

IN THE VIEW OF REDNOND WONG, CHIEF CHINA MARKET STRATEGIST AT BAER HONG KONG, THE LIKELIHOOD OF SHAREHOLDERS AND CREDITORS OF EVERGRANDE'S HONG KONG-LISTED COMPANY RECEIVING ANY BENEFIT FROM THE LIQUIDATION PROCESS IS VERY LOW.

Wang Bo, chief investment officer of Jurun Capital, also pointed out that first of all, whether offshore liquidation is equivalent to domestic merger and bankruptcy needs a clear definition. Moreover, even if it is equivalent, it is difficult to say whether the mainland can enforce the same amount of judicial bankruptcy.

Gap: "inside and outside" Evergrande, the difference is huge

"Overseas investors should pay close attention to whether the liquidator can successfully apply to the mainland court for assistance in obtaining mainland assets in accordance with the cooperation mechanism. "That's a tip from a lot of agencies.

In the end, if the foreign investor cannot obtain the recognition of the mainland court, it can only apply for liquidation of assets outside the mainland.

So how big is the gap between the assets of Evergrande Group and China Evergrande?

According to the 2023 semi-annual report of Evergrande Real Estate Group Co., Ltd.'s bonds, as of the end of June 2023, Evergrande Real Estate Group's total assets totaled 1.38 trillion yuan, total liabilities were 1.77 trillion yuan, and net assets were -386.7 billion yuan.

Among them, the largest proportion of total assets is inventory, about 1 trillion yuan. Land use accounted for nearly half of the inventory, and Evergrande Group's land bank still had 210 million square meters during the reporting period. In addition, the 170.5 billion yuan in the inventory that was used for mortgage loans also corresponds to some high-quality projects across the country.

On the other hand, China Evergrande (03333.HK), from the restructuring plan, it can be seen that one of the overseas debts to be paid is Evergrande Group's new notes, the other is Evergrande Property, Evergrande New Energy Vehicles or China Evergrande Equity-linked Notes Portfolio, all of which are equity (corresponding to stock appreciation and dividends) and have no assets.

In addition, according to China Evergrande's 2022 annual report, Evergrande Group also holds equity in overseas subsidiaries such as Guoneng Electric Vehicle (Sweden) Co., Ltd. FF Automobile, and holds overseas monetary funds equivalent to about 17.947 billion yuan.

The assets in the shell of China Evergrande (03333.HK) only include the China Evergrande Center in Hong Kong, Junlong Bay in Hong Kong (some properties are for sale), the undeveloped land in Yuen Long, Hong Kong (the price is about US$636 million and has been used to repay Evergrande's financial obligations in the project), and the Château Montebello Hotel in Canada, which are mainly commercial and office-based.

In addition, according to media reports, Evergrande and Xu Jiayin have sold their luxury yachts and private jets, but the proceeds have not been fully announced whether they will be returned to the Hong Kong-listed company or whether they will be used in other ways.

In contrast, it is clear who is rich and who is poor.

Market outlook: Quickly cut through the mess and continue to digest the negative

It is worth mentioning that on the day when China Evergrande (03333.HK) was officially issued a liquidation order, Evergrande Automobile (00708.HK) and Evergrande Property (06666.HK) were suspended intraday, the Hang Seng Index rose on January 29, and the real estate sector still rose slightly.

This shows that the impact of the Evergrande incident has been gradually digested by the market. Singapore's BofA analysts told Windfinance.

However, for the domestic real estate companies that are out of risk, the short-term impact of Evergrande's liquidation on industry sentiment will continue for some time, after all, Evergrande's result is because there are many internal and self-existing problems in its restructuring process, which may affect the market's credibility and quality judgment of other developers, and the latter has to give more concessions in negotiations.

Andrew Collier, managing director of Hong Kong's Oriental Capital Research Company, also believes that from a macro perspective, Evergrande's liquidation is a positive signal that China is willing to go out of the extreme to calm the property bubble, which is good for the economy in the long run, although it still needs to go through difficult times in the short term.

Wang Yuchen also pointed out that Evergrande's debt crisis may affect further investor confidence in the industry, or prompt relevant authorities to strengthen real estate supervision and risk management. However, during the liquidation process, there may be a new investor or management team to take over most of Henderson's assets and projects, or to effectively resume the construction of the project, which is a positive sign.