China’s Evergrande Says it is Asking for US Court to Approve Debt Plan, Not Filing for Bankruptcy

Edited by: TJVNews.com

A giant Chinese real estate developer that is struggling to avoid defaulting on $340 billion in debt said Friday it is asking a U.S. court to approve a restructuring plan for foreign bondholders and rejected what it said were news reports that suggest it filed for bankruptcy, as was reported by the AP.

Evergrande Groupe’s mountain of debt prompted fears in 2021 of a possible default that might send shockwaves through the global financial system. China’s government has tried to reassure investors that its problems are contained and that lending markets will be kept functioning.

The AP report said that the request Thursday under Chapter 15 of the U.S. bankruptcy code is “a normal step in the overseas restructuring procedure and doesn’t involve bankruptcy filings,” the company said in a statement issued in Hong Kong. It cited unspecified “media reports” and said it was clarifying the situation.

The company said it negotiated a restructuring with investors in its U.S. dollar-denominated bonds under the legal systems of Hong Kong and the British Virgin islands but needs approval from a bankruptcy court in New York City because they are governed by New York state law, according to the AP report.

Evergrande ran short of cash after Beijing tightened controls in 2020 on corporate debt the ruling Communist Party worries is dangerously high. Some other developers collapsed, leaving half-finished apartment blocks standing empty.

Evergrande said it had more assets than debt but had trouble turning slow-selling real estate into cash to repay creditors, the AP report added.

On Thursday, Evergrande Group, had taken a significant step by filing for Chapter 15 bankruptcy protection in a U.S. court, CNBC reported. The filing, submitted to the Manhattan bankruptcy court, references ongoing restructuring proceedings in various jurisdictions, including Hong Kong, the Cayman Islands, and the British Virgin Islands. This move comes as Evergrande continues to grapple with a mounting debt crisis that has had far-reaching implications for China’s property sector and economy, according to the CNBC report.

Evergrande, once the world’s most indebted property developer, faced a default in 2021 and later announced an offshore debt restructuring initiative in March. The CNBC report said that its shares have been suspended from trading since March 2022, casting a shadow of uncertainty over the future of the company.

Chapter 15 bankruptcy protection enables a U.S. bankruptcy court to intervene in cross-border insolvency cases involving foreign companies that are undergoing restructuring due to creditors’ pressures. The CNBC report noted that the primary aim of this protection is to safeguard the assets of debtors and facilitate the rescue of financially distressed businesses.

The filing is not isolated, as Tianji Holdings, an affiliate of Evergrande, and its subsidiary Scenery Journey, have also sought Chapter 15 protection in a Manhattan bankruptcy court, as indicated in the filing and reported by CNBC.

Evergrande’s bankruptcy filing comes amidst concerns of contagion, as China’s property sector woes could potentially spread to other segments of the economy, which is already grappling with slowing growth. CNBC reported that this has been evident in recent events, such as Country Garden, a once-prominent Chinese developer, struggling with coupon payments on U.S. dollar-denominated bonds and issuing a profit warning.

China’s expansive real estate sector has long been a cornerstone of the nation’s economic growth, accounting for a substantial portion, up to 30%, of the country’s gross domestic product (GDP). Despite recent policy shifts signaling increased support for the property sector, apprehensions persist among investors, the CNBC report noted.

In July, Evergrande reported combined losses of $81 billion over the past two years, primarily attributed to challenges in completing projects, repaying suppliers, and meeting financial obligations to lenders. According to the CNBC report, the net losses for 2021 and 2022 were notably significant, amounting to 476 billion yuan ($66.36 billion) and 105.9 billion yuan ($14.76 billion), respectively.

The bankruptcy filing was signed by Jimmy Fong, who designated himself as a “foreign representative” of China Evergrande Group. As was reported by CNBC, a meeting involving “scheme creditors” is scheduled for Wednesday at the Hong Kong office of Sidley Austin, the U.S.-based law firm representing Evergrande. The development further underscores the ongoing turmoil and uncertainty surrounding China’s property sector and its broader economic implications.

In a related development, earlier this week, the Jewish Voice reported that Country Garden, one of China’s leading real estate developers, is on the brink of default as it grapples with billions of dollars in losses and an accumulated debt of around $200 billion, as was reported by the New York Times. The company, responsible for potentially delivering nearly one million apartments across various cities in China, has been hit hard by a slump in the housing market. The NYT report indicated that this possible default comes as China seeks to recover from the economic fallout of the pandemic and stimulate growth, but the ongoing housing crisis is posing a significant challenge.

Founded by a farmer three decades ago, Country Garden was once seen as a successful model in the real estate industry.  Founded in 1992 by Yang Guoqiang, Country Garden was a beneficiary of the world’s biggest real estate boom. The NYT report said that its success turned Yang into a billionaire and became a testament to the country’s remarkable growth. Chinese people, having few other reliable options to build wealth, invested their incomes and savings in real estate, the report added.

However, the NYT report said that like many other developers, it borrowed heavily to sustain its expansion and operations, assuming that growth would continue to fuel its debt repayment. As the company’s bills piled up, China’s government imposed stricter regulations on real estate companies to curb excessive borrowing and speculative practices, the NYT report said.

But the bills kept mounting at a feverish pace and the authorities began to fear the debt would threaten the broader financial system, the NYT report said.  China’s president, Xi Jinping, ordered that homes should be for living, not for speculation. In 2020, the government cracked down, limiting the ability of real estate companies to raise money and prompting a series of defaults.

Even as other developers stopped paying their bills, Country Garden continued to make good on its obligations. The NYT report said that it began to rely more heavily on the revenue from selling apartments before they were finished and using that money to help finance its operations.

A slump in home buying this year has placed the company in a crisis, facing what it described as the “biggest difficulties since its establishment.”

While Country Garden initially managed to meet its obligations, a significant decline in home buying this year has pushed the company into crisis mode. As was reported by the NYT, Country Garden skipped two interest payments on loans. If it does not pay up by early September or get the creditors to give it more time after that 30-day grace period, it will default, the NYT report said. This prospect has rattled investors, causing the company’s share price to plummet. Country Garden is expected to report a loss of up to $7.6 billion for the first half of the year.

In an attempt to project confidence in the future,, Country Garden’s president, Mo Bin said last week,   “One shall pick himself up from where he has fallen,” pledging to “spare no effort,” according to the NYT report.

Experts are concerned that a Country Garden default could have ripple effects similar to those caused by the collapse of China Evergrande in 2021. The scale of the potential default, coupled with an already edgy market, has intensified worries. However, the NYT report said that Chinese policymakers have signaled a willingness to support the housing market through measures such as lowering interest rates to stimulate apartment purchases.

Rosealea Yao, a real estate analyst at Gavekal, a China focused research firm told the NYT, “The Country Garden default could be as influential as Evergrande simply because it is so huge,”

And it could be even worse. A handful of big developers have already defaulted. The market is more on edge than it was when Evergrande failed, according to the NYT report. Policymakers, while recently vowing to support the housing market, have not done enough to bolster confidence.

“Things may get worse before the government reacts,”  Yao told the NYT.

China’s leadership has recognized the need to pivot away from over-reliance on real estate for economic growth. While the government may intervene to ensure buyers receive the apartments they paid for, the days of unchecked debt accumulation for speculative projects are likely over, according to the NYT report. The broader impact of a default extends to suppliers, contractors, and workers who depend on real estate companies for business.

The challenge now lies in striking a balance between stabilizing the real estate market, preventing systemic financial risks, and encouraging sustainable economic growth. With billions of dollars in unpaid bills owed by private Chinese developers, the government faces complex decisions that will determine the future trajectory of China’s housing industry and its wider economy.