Many will have assumed this was purely a Chinese problem and the fall out would be managed in China. In a globally interconnected world this isn’t the case, as there will be spillover effects in the West, too.
Evergrande was once the country’s top property developer but has been struggling since a liquidity crunch hit the country in 2021, forcing it to default on its debts.
It has posted an eye-watering $80 billion loss over the past two years and has more than $300billion in total liabilities.
That makes it the world’s most heavily indebted property developer and triggered fears of contagion across China and beyond.
Billions of dollars worth of repayments are falling due over the next year, and it can’t afford to make them
In a bid to buy time, Evergrande is now going through a complex restructuring process. As part of this, it has sought protection under Chapter 15 of the US bankruptcy code.
That’s an odd look because the company has its headquarters in China’s tech hub, Shenzhen.
Evergrande’s shares were listed in Hong Kong until being suspended in 2022. Founder Xu Jiayin was once China’s richest man worth $13billion in 2021, according to Forbes. No longer.
After borrowing aggressively to fund its expansion during the Chinese property boom, Evergrande ran out of money and can’t repay its bonds.
As well as selling assets it has even resorted to borrowing money from its employers, who won’t get a bonus unless they stump up.
For the last two years investors have been crossing their fingers and hoping for a government bailout, but that doesn’t look likely now.
Chinese premier Xi Jinping has only offered minimal support and in any case Beijing has too many debts to add more to its pile.
Evergrande company manages more than 1,300 developments projects in more than 280 Chinese cities, and also owns theme parks, sports teams, electric vehicles and consumer goods.
None of which has much to do with the US. Indirectly, though, it could have a big impact.
Evergrande doesn’t build any properties in the US or Europe. Yet it has filed for bankruptcy in the US because Chapter 15 offers protection to non-US companies, too.
It shields businesses that are undergoing restructurings from creditors who would otherwise try to sue them or tie up assets in the US and other countries.
So it’s a defensive measure but a revealing one. It shows that Evergrande doesn’t just owe money to Chinese banks and businesses, but overseas as well.
The New York filing is procedural in nature but is an obligatory part of a restructuring process under US law.
Evergrande has a hefty $31.7billion of offshore debt restructuring, which include bonds, collaterals and repurchase obligations.
It announced an offshore debt restructuring plan in March and is now gathering creditor support to complete the process.
The company’s creditors will vote on the restructuring proposal later this month. It may then seek approval by Hong Kong and British Virgin Islands courts in the first week of September.
Evergrande affiliate, developer Tianji Holdings, has also sought Chapter 15 protection.
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Evergrande isn’t the first Chinese developer to file for Chapter 15 protection. The Modern Land (China) Co. Ltd, which missed payments on offshore bonds due in October 2021, has previously filed a petition.
A big worry is that Chinese developers who have been active in the US have also been flagged up as risks.
In 2021, Oceanside Holdings, China Vanke and Greenland all crossed at least one of the “three red lines” set by Chinese regulators.
So far, we do not know how bad contagion will be but many have compared this to the collapse of Wall Street bank Lehmans, which triggered the global financial crisis after going under in 2008.
With the world on the brink of a recession, a Chinese property meltdown is the last thing we need.
Beijing seems to want to make an example of Evergrande by letting it go to the wall, but it may step in at some point to protect Chinese creditors.
As for those offshore creditors, they’ll be on their own.
