What is the impact of Evergrande's withdrawal of its application for bankruptcy protection to a U.S. court on its debt restructuring

Finance Associated Press, March 25 (Reporter Wang Haichun, Li Jie) China Evergrande, which was liquidated, withdrew its previous bankruptcy protection application to the U.S. court.

"To the understanding of the Joint and Several Liquidators, the legal advisers to the former foreign representatives of the Company, King Cheng and Tianji have filed documents with the US Court on March 22, 2024, withdrawing the respective Chapter 15 applications of the Company, Jing Cheng and Tianji. Evergrande said in the announcement a few days ago.

Lawyer Wang Yuchen, director of Beijing Jinsu Law Firm, believes that Evergrande's withdrawal of the bankruptcy protection application will suspend its debt restructuring, which is equivalent to overturning Evergrande's previous coordination with creditors and other parties and the corresponding reorganization plan.

It pointed out that one of the difficulties in Evergrande's debt restructuring lies in the complexity of Evergrande's debt. Due to the large scale, high amount and diverse types of debt, this means that Evergrande's debt restructuring plan needs to comprehensively sort out the debt situation, seek solutions and coordinate with creditors, and then determine the subsequent restructuring plan.

Why was the bankruptcy protection petition withdrawn?

The reason for the withdrawal of Evergrande's application also starts with last year's overseas debt restructuring and Evergrande's application for bankruptcy protection in the Manhattan court in New York.

According to Evergrande's offshore debt restructuring plan announced in March last year, Evergrande said it had made some progress with the creditors' special group on the relevant restructuring and intended to reach a binding agreement on the core terms of the restructuring.

Among them, Evergrande issued US$13,922.5 million of US dollar senior secured notes and US$5,226 million of US dollar senior notes issued by Jingcheng Co., Ltd. and guaranteed by Tianji Holdings Co., Ltd. The total amount of the aforementioned bonds is about US$19,148.5 million, accounting for about 84.4% of Evergrande's US$22.7 billion foreign debt.

In the package proposed by Evergrande for creditors at that time, the main ways were to borrow new to repay old ones, debt-to-equity swaps, and a combination of the two. Holders can swap debt for new bonds with longer maturities, as well as equity interests in Evergrande's two subsidiaries, Evergrande Property and Evergrande Automobile. The new bonds will have a variety of maturities and coupons, with conditions such as no interest payment for the first three years.

In August last year, Evergrande announced that it was advancing the overseas debt restructuring as planned, and because Evergrande Group's US dollar bonds were governed by New York law, the company applied to the U.S. court for recognition of the offshore debt restructuring arrangements under the legal system of Hong Kong and the British Virgin Islands (BVI) in accordance with Chapter 15 of the United States Code, which is part of the normal overseas restructuring process and does not involve bankruptcy filings.

Investment bankers pointed out that according to the relevant provisions of the U.S. bankruptcy law, the U.S. bankruptcy court is allowed to recognize bankruptcy or debt restructuring proceedings involving foreign countries, while non-U.S. companies can use Chapter 15 of the bankruptcy law to prevent creditors from filing lawsuits against applicants in the United States or freezing their assets, so as to buy them more time for debt restructuring.

Lawyer Wang Yuchen told reporters that Evergrande's previous bankruptcy protection application to the U.S. court is conducive to the cooperation between the U.S. court and the courts of other countries to solve Evergrande's asset problems when it is involved in transnational and cross-regional bankruptcy proceedings, so as to promote Evergrande's cross-regional integration of its foreign assets and debts, expand the scope of asset restructuring as much as possible, preserve its foreign assets accordingly, and avoid repeated debt crises in many countries as much as possible.

However, according to the information disclosed by Evergrande recently, in view of the appointment of the relevant liquidators of Evergrande, it is expected that the relevant arrangements will not be carried out in the current manner.

An investment banker told reporters that Evergrande had previously announced a plan to restructure its debts, so it needed to apply for bankruptcy protection, but now it seems that the plan has not been implemented, and the previously announced restructuring plan has in fact failed, so the application should theoretically be withdrawn.

"There are prerequisites for the application of Chapter 15, but Evergrande is currently difficult to meet these prerequisites and should be withdrawn. In addition, the application will also incur a certain amount of payment, since it is difficult to implement and the relevant provisions cannot be applied, there is no need to waste a lot of legal fees. Huang Lichong, President of Huisheng International Capital, said.

A number of analysts said that from the current situation of Evergrande, its debt restructuring still faces many difficulties.

Wang Yuchen pointed out that after filing a bankruptcy protection application with a U.S. judge, Evergrande's business crisis has not been significantly alleviated, and Evergrande was issued a winding-up order this year, after which Evergrande received resumption guidance, if Evergrande can not meet the review guidelines and resume trading within the specified period, it may be directly delisted. In addition, the domestic regulatory authorities imposed heavy fines on Evergrande's financial fraud, and behind this series of penalties is the intensification of Evergrande's business crisis.

"The continuous decline in creditor trust and other cascading effects will have a certain impact on the finalization and implementation of Evergrande's restructuring plan. Evergrande's withdrawal of the bankruptcy application cannot be ruled out after taking into account its negotiations with creditors, local punishment measures, the current situation of the enterprise, etc., and finding that the previous reorganization plan is no longer the best plan for the current Evergrande. Of course, it is not excluded that Evergrande has already had other better plans after benign communication with creditors, so it withdrew the bankruptcy protection application. As for whether it is necessary to restart the debt restructuring in the future, the start time, and the start method, etc., it is also necessary to formulate a corresponding plan according to the new situation. Wang Yuchen added.

It is more difficult to reorganize

What is the impact of Evergrande's withdrawal of the bankruptcy protection application filed by the US court on its offshore debt restructuring?

"Chapter 15 bankruptcy law is part of the U.S. bankruptcy law designed to deal with cross-border bankruptcy cases and allows foreign business bankruptcy cases to be recognized and assisted in the United States. The withdrawal of the application may mean that Evergrande lacks legal protection in the United States, and creditors can enforce Evergrande's assets in the United States, thus affecting its asset protection and debt restructuring process worldwide. Huang Lichong said in an interview with reporters.

It further pointed out that according to the current situation, the probability of Evergrande achieving offshore debt restructuring is low, and whether it can continue and succeed depends on the attitude and support of relevant departments, the cooperation of creditors, and the improvement of asset sales and liquidity.

"On the one hand, the attitude and support provided by the relevant departments to Evergrande's debt handling will play an important role in Evergrande's debt restructuring, but the heavy penalty imposed by the CSRC on Evergrande may mean that the support in this regard is relatively limited. On the other hand, Evergrande's debt restructuring requires the consent of all or most creditors, and disagreements among creditors may complicate the restructuring process, and it will be difficult to proceed without a plan acceptable to creditors and the court. Huang Lichong said.

In this regard, Shen Meng, executive director of Xiangsong Capital, also believes that if the relevant departments take compulsory measures against Evergrande assets, the traceable assets of creditors in overseas debt restructuring may be reduced, and if the number of assets used for debt restructuring is reduced, the willingness of overseas creditors to accept restructuring may be weakened.

Huang Lichong pointed out that whether Evergrande can increase liquidity through asset sales or other means is also the key to the success of the restructuring. Given that the current asset sales are facing problems such as sluggish market demand and unsatisfactory prices, which will affect Evergrande's ability to raise funds, its chances of improving in this regard are relatively slim at present.

In addition, analysts believe that the legal and regulatory environment in China and other countries and regions involved in Evergrande will also have an impact on the feasibility and process of debt restructuring.

"Evergrande's ability to handle debt internationally may be limited after withdrawing the U.S. bankruptcy protection filing. Although Evergrande is facing many difficulties in debt restructuring, this does not mean that Evergrande's debt restructuring is completely impossible, but the opportunity is very slim. Huang Lichong added.

In Shen Meng's view, Evergrande's previous application for bankruptcy protection and the current withdrawal of the application may be a game of interests launched by Evergrande.

"Evergrande previously applied for bankruptcy protection in order to protect the rights and interests of its assets, and after Xu Jiayin and most of Heng's management were taken away to cooperate with the investigation, Xu Jiayin's ex-wife preserved the property in her son's name through overseas legal proceedings, which may be a manifestation of the game. However, not long ago, the regulator's determination of Evergrande's performance and profit inflated has exerted considerable pressure on Evergrande, which may have a certain impact on Evergrande's related debt restructuring arrangements. Shen Meng said in an interview with reporters.

Shen Meng believes that considering that the protection priority of domestic home buyers is higher than that of creditors, and some assets may be subject to stricter supervision by relevant departments, it is expected that Evergrande's future overseas debt restructuring may be greatly affected, and the game with debt restructuring will continue.

(Finance Associated Press reporter Wang Haichun, Li Jie)