China Evergrande Group, the real estate behemoth whose default triggered a broader property debt crisis two years ago, has sought Chapter 15 bankruptcy protection in New York. This move shields the company from creditors in the US as it navigates a restructuring deal elsewhere. The Chapter 15 petition references ongoing restructuring proceedings in Hong Kong and the Cayman Islands.
Protecting International Debt Restructuring Deals
Chapter 15 bankruptcy protection is often sought during the final stages of international debt-restructuring deals. This protection ensures that the restructuring process can proceed without interference from creditors in the US. Last year, Beijing-based developer Modern Land China Co. also filed for Chapter 15 bankruptcy protection after facing challenges in repaying a $250 million bond and pursuing an offshore debt restructuring deal.
Implications for China’s Financial Landscape
The fate of Evergrande holds significant implications for China’s vast $60 trillion financial system. Its troubles could potentially impact banks, trusts, and millions of homeowners, making it one of China’s largest-ever restructurings. Given the colossal size of Evergrande’s liabilities, exceeding $300 billion, the restructuring process is likely to be protracted.
Deepening Property Debt Crisis
China’s property debt crisis is entering its fourth year, with developers accustomed to heavy borrowing experiencing a shift. In 2020, Chinese authorities introduced “three red lines” as leverage benchmarks for builders seeking additional borrowing. The distress in China’s property sector is evidenced by the struggles of Chinese junk dollar bonds, predominantly issued by developers, which now trade at around 65 cents on average, according to a Bloomberg index.
Evergrande’s Struggles and Restructuring Efforts
Seeking a Solution
Evergrande has been diligently working on an offshore debt restructuring plan for several months. In April, the company revealed that it hadn’t garnered sufficient creditor support to implement the plan. In July, it received court approval to conduct votes on the deal. Recently, the company postponed “scheme meetings” for creditors to August 28.
Impact on Electric-Vehicle Unit
A Strategic Move
Evergrande’s electric-vehicle unit recently agreed to sell about 28% of its stake to Dubai-based startup NWTN Inc. This move boosted the carmaker’s shares, as it is seen as a lifeline that could ensure the unit’s survival. NWTN’s investment of $500 million in China Evergrande New Energy Vehicle Group Ltd. includes shares and a majority stake in the EV maker’s board.
Implications for Debt Restructuring
The disposal of the stake to NWTN could potentially benefit Evergrande’s debt plan. Upon full exchange of the unit’s mandatory exchangeable bonds, NWTN could become the largest shareholder. The funding access of Evergrande’s EV unit could contribute to the value of these securities in the company’s debt plan. Moreover, it could aid in the normalization of production for the Hengchi 5 EVs.
The Chapter 15 bankruptcy protection sought by China Evergrande Group marks a pivotal step in its journey toward restructuring and stabilizing its financial position. The broader implications on China’s financial landscape and the property sector are closely watched, as the company’s fate continues to unfold.