China’s Evergrande Group, the world’s most indebted property developer, has filed for bankruptcy protection in the United States on Thursday, court documents showed. The move is aimed at protecting its US assets while it attempts to restructure its massive debt of about $300 billion.
Evergrande, once China’s top developer, defaulted on its debt repayments in 2021, triggering a liquidity crisis that sent shockwaves through the global financial markets. The company’s Hong Kong-listed shares have been suspended from trading since March 2022.
The company sought protection under chapter 15 of the US bankruptcy code, which provides mechanisms for dealing with insolvency cases involving more than one country. The code also shields the US assets of a foreign company from creditors while it works on a restructuring deal.
According to the court filings, Evergrande has assets of $21.9 billion and liabilities of $24.4 billion in the US. The company owns several properties in New York, Los Angeles and San Francisco, as well as stakes in electric car maker Faraday Future and video streaming platform Huya.
Evergrande’s debt restructuring faces challenges and uncertainties
Evergrande has been working on an offshore debt restructuring agreement since late 2021, and unveiled a proposal earlier this year. It offered creditors a choice to swap their debt into new notes issued by the company and equities in two subsidiaries, Evergrande Property Services Group and Evergrande New Energy Vehicle Group.
However, the proposal has faced resistance from some bondholders, who have demanded better terms and more transparency from the company. Some creditors have also filed lawsuits against Evergrande in Hong Kong and the Cayman Islands, seeking to recover their investments.
Moreover, Evergrande’s financial situation has deteriorated further in recent months, as it posted a combined loss of $81 billion for 2021 and 2022. The company also warned that it may not be able to continue as a going concern, and that its ability to complete its projects was uncertain.
Evergrande’s bankruptcy filing in the US does not guarantee that it will be able to reach a deal with its creditors, nor that it will be able to resume its operations in China. The company still needs to obtain approval from the Chinese authorities, who have tightened their scrutiny on the real estate sector and imposed strict regulations on debt levels and property prices.
Evergrande’s collapse could have ripple effects on China and the world
Evergrande’s fate has broad implications for China’s $60 trillion financial system, and could send ripples across banks, trusts, suppliers, homebuyers and investors around the world. The company accounts for about 4% of China’s property market, and employs about 200,000 people directly and indirectly.
Evergrande’s default could trigger a wave of defaults among other highly leveraged developers in China, who are facing similar liquidity pressures and regulatory constraints. This could lead to a sharp contraction in the property sector, which accounts for about 25% of China’s GDP and 70% of household wealth.
A slowdown in the property sector could also weigh on China’s economic growth, which has already been hit by weak domestic demand, rising inflation, trade tensions and Covid-19 outbreaks. China’s GDP growth slowed to 7.9% year-on-year in the second quarter of 2023, down from 18.3% in the first quarter.
Evergrande’s troubles could also affect the global economy, as the company has borrowed heavily from foreign banks and investors. According to Bloomberg, Evergrande owes about $19 billion to offshore bondholders, $32 billion to foreign banks and $143 billion to domestic lenders. A disorderly default by Evergrande could spark a contagion risk and a loss of confidence in emerging markets.