Real estate bankruptcy in China
How long can Evergrande stay afloat?
February 4, 2024, 5:47 p.m
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The Chinese Evergrande Group’s years of infirmity are over. A Hong Kong court this week decides to dissolve the heavily indebted real estate giant. How does it go from here? Will creditors get their money back? And does the bankruptcy also affect German companies? Insolvency expert Elske Fehl-Weileder answers the most important questions. In focus: the complicated corporate structure.
Ms Fehl-Weileder, a judge in Hong Kong, has decided to liquidate the real estate group Evergrande. Hong Kong, however, is subject to a different legal system than mainland China. Will China even recognize the bankruptcy?
Elske Fehl-Weileder: China will probably formally recognize the insolvency. There are various agreements, for example a recent recognition agreement that applies, among other things, to Shenzhen, where some operating companies of the China Evergrande Group are based. Nevertheless, it is questionable whether the liquidation decision and a corresponding procedure will have a direct impact on the Evergrande Group as a whole. The group probably not only consists of companies in different countries, but also probably operates through two different strands: One, to which the holding company probably belongs, includes the companies that are responsible for financing. The other consists of the operational companies in which the construction projects are organized.
So with the now announced winding up of Evergrande, is the holding company and thus the financing line affected?
Yes, you can certainly speak of a “stock exchange company” – the vehicle for collecting capital for operational business and being able to service liabilities there, for example for real estate projects. This holding company is listed on the Hong Kong Stock Exchange and is based in the Cayman Islands. Therefore, in terms of corporate law, it is probably not identical to the operating companies operating in China. China also has no legal agreement with the Cayman Islands – this is likely to play a role in the question of recognition of the liquidation decision.
Can Evergrande stay afloat financially without the stock exchange company?
Elske Fehl-Weileder is a specialist lawyer for insolvency and restructuring law at the law firm Schultze & Braun in Nuremberg. She is an expert in Chinese insolvency law and a member of the German-Chinese Lawyers’ Association.
First of all, money from the financing line will probably no longer flow into the operational business, for example to pay building contractors or service loans. Claims for damages or the reversal of purchases are no longer guaranteed. If the liquidation decision is implemented, the money tap for China Evergrande will finally be turned off from this side. At the same time, investors will assert their claims. Evergrande can only stay afloat if it gets money from another source, for example from Chinese state banks.
How likely is it that the entire company will be dissolved as a result of the Hong Kong ruling?
It is very unlikely that this court decision will be implemented in China. After all, the judgment came in proceedings initiated by a foreign creditor. The Chinese government’s primary interest now is to keep the many home buyers somewhat harmless. The government recently ordered state-owned banks to provide further support to construction companies.
What are the next steps in the resolution?
When a company is liquidated, the existing assets – i.e. financial resources, but also assets – are utilized in order to satisfy the creditors. Of course, the exciting question arises as to what assets the Hong Kong stock exchange company actually has. The exact proportions of the investments and connections in the Evergrande Group are not visible from the outside.
So what are the chances for creditors to get their money back?
In principle, it is common practice in the real estate sector for the proceeds from operational business to go to investors, for example as interest payments on their investment. However, such purely contractual claims do not actually represent tangible assets. It may well be that the assets are held by China Evergrande’s operating companies. That would mean that the creditors of the “stock exchange company” probably won’t get much in return. And even if the properties can be assigned directly via investments or the holding company, it will probably be difficult to access them. It can be assumed that China’s government will do everything in its power to enable continued construction and to give domestic creditors priority over foreign capital market creditors.
Are creditors from Germany also affected?
It is possible that someone bought shares through a fund and would now be a creditor in the Hong Kong proceedings. However, the effects of the financial difficulties of Evergrande and other major players in the real estate market could affect German companies in a detour. The real estate crisis in China is having an impact on the overall Chinese economy. In addition, the population invested very heavily in real estate because there was hardly any other way to invest their money in China. The impact of the whole thing may also affect German companies that do business there.
In addition to Evergrande, other real estate companies in China are also heavily indebted. Is there a risk of a domino effect that could bring down even more construction companies?
In my opinion, China is not going to take a hard line: you’ve had enough time to come to an agreement with your creditors and if you haven’t, we’ll wind you all up. The government may see some slowdown as necessary, but overall the real estate sector is very important to China economically and socially. Complete collapse cannot be risked.
Victoria Robertz spoke to Elske Fehl-Weileder
The interview first appeared on Capital.de