Evergrande seeks US court nod for $32 billion debt overhaul as China economic fears mount

By Clare Jim, Jonathan Stempel and Dietrich Knauth

HONG KONG/NEW YORK (Reuters) – Embattled developer China Evergrande (HK:) Group has filed for U.S. bankruptcy protection as part of one of the world’s biggest debt restructurings, as anxiety grows over China’s worsening property crisis and its impact on the weakening economy.

China unexpectedly lowered several key interest rates earlier this week in a bid to shore up struggling activity and is expected to cut prime loan rates on Monday, but analysts say moves so far have been too little, too late, with much more forceful measures needed to stem the economy’s downward spiral.

Once China’s top-selling developer, Evergrande has become the poster child of an unprecedented debt crisis in the country’s property sector, which accounts for roughly a quarter of the economy, after facing a liquidity crunch in mid-2021.

The developer has sought protection under Chapter 15 of the U.S. bankruptcy code, which shields non-U.S. companies that are undergoing restructurings from creditors that hope to sue them or tie up assets in the United States.

While the step is seen as procedural, it indicates that the company is nearing the end of its restructuring process after more than one and a half years of negotiations with creditors.

Evergrande said in a filing on Friday that it will ask the U.S. court for recognition of schemes of arrangement under the offshore debt restructuring for Hong Kong and the British Virgin Islands as its dollar notes are governed by New York law.

“The application is a normal procedure for the offshore debt restructuring and does not involve (a) bankruptcy petition,” it said in the filing, adding it is pushing forward with its offshore debt restructuring.

The company proposed scheduling a Chapter 15 recognition hearing for Sept. 20.

Evergrande’s offshore debt restructuring involves a total of $31.7 billion, which include bonds, collateral and repurchase obligations. It will meet with creditors later this month on its restructuring proposal.

A string of Chinese property developers have defaulted on their offshore debt obligations since Evergrande ran into trouble, leaving unfinished homes and unpaid suppliers, shattering consumer confidence in the world’s second-largest economy. Property investment, sales and new construction starts have been contracting for over a year.

DOMINO EFFECT?

The property crisis has also fanned worries about contagion risks to the financial system, which could have a destabilising impact on an economy already weakened by tepid domestic and foreign demand, faltering factory activity and rising unemployment.

A major Chinese asset manager has missed repayment obligations on some investment products and warned of a liquidity crisis, while Country Garden, the country’s No.1 private developer, has become the latest to flag a stifling cash crunch.

Angry investors in trust products of Zhongrong International Trust Co., a unit of the asset manager, have lodged complaint letters with regulators, pleading with the authorities to step in after the trust firm missed payments.

Nomura on Friday followed some of the major global brokerages to cut China’s growth forecast for this year. It now sees China’s gross domestic product (GDP) growing 4.6% this year, down from an earlier forecast of 5.1%, but much of that growth may have come in the first quarter after strict COVID curbs were lifted.

China is targeting 5% growth for this year, but an increasing number of economists are warning that it could miss the goal unless Beijing ramps up support measures.

China’s economic and property woes and the absence of concrete stimulus steps have sent a chill through global markets. Asian shares posted a third straight week of declines. Chinese blue-chips dropped 1.2% on Friday and Hong Kong’s slumped 2.1%.

In an attempt to boost investor confidence, China securities regulator said on Friday it would cut trading costs and support share buybacks as it unveiled measures aimed at reviving the stock market.

But so far, the scope of support that Beijing has offered has underwhelmed financial markets, with some analysts wondering if policymakers are reluctant to risk adding to a mountain of debt created in part by massive stimulus in the past.

“To be sure, the economic downturn is putting a great deal of strain on financial sector balance sheets, and it does increase the risk of a messy policy mistake if officials don’t handle the situation with care. But we still think a full-blown financial crisis is a tail risk rather than a probable outcome,” Capital Economics said in a report.

DEBT RESTRUCTURING

China’s central bank reiterated it would adjust and optimise property policies, according to its quarterly policy implementation report this week.

Since mid-2021, companies accounting for 40% of Chinese home sales have defaulted, most of them private property developers.

Longfor Group, China’s second largest private developer, said on Friday it would try to boost profitability in response to changing supply and demand.

The Beijing-based developer posted a 0.6% rise in first-half core profit, and said it would strive to return to positive cash flow this year and not take on new interest-bearing debt.

“The China property sector is like a black hole, so many developers have been dragged into it since two years ago after Evergrande,” said Winner Zone Asset Management CEO and CIO Alan Luk.

“The central government has yet to introduce (strong) measures because this is too large a hole to fill.”