By
Chimamanda U. Martha
October 17th, 2023
Evergrande’s affiliate Tianji Holdings and the company’s subsidiary Scenery Journey have also filed for Chapter 15 protection in the US court.
Evergrande Group, the Chinese second-largest property developer, has filed for Chapter 15 bankruptcy protection in the Manhattan bankruptcy court. The application would allow Evergrande to protect its assets in the US while it is working on a multi-billion dollar deal with creditors.
Evergrande’s Crisis
Evegrande is an investment-holding real estate company engaged in property development, property investment, property management, and property construction. With more than 1,300 projects in more than 280 cities in China, Evergrande has cooperated with more than 860 well-known companies around the world. The company was prospering until 2020 when Chinese authorities introduced new rules to control the amount that big real estate firms could borrow.
In 2020, the Chinese government imposed a “three red lines” policy to regulate the leverage taken on by developers, limiting their borrowing based on the following metrics: debt-to-cash, debt-to-equity, and debt-to-assets. Notably, by October 2021, those regulations were violated by 14 of China’s 30 biggest developers at least once.
The real-estate crisis began, as major property giants ran out of cash. It affected Evergrande Group, leading to its multiple debts and default. The company missed a crucial deadline and failed to repay interest on around $1.2 billion of international loans. In October 2021, Evergrande announced that it would raise $5 billion by selling a 51% stake in its property management unit to Hopson Development.
For 2021 and 2022, Evergrande suffered an $81 billion combined loss that was primarily attributed to write-downs of properties, return of land, losses on financial assets, and mounting finance costs. By the end of 2022, Evergrande’s total liabilities surged from $300 billion at the time of its default to $340 billion.
Filing for Chapter 15 Protection
Earlier this year, Evergrande revealed its plans to restructure around $20 billion in overseas debt. The filing for Chapter 15 in the US court is a part of the restructuring strategy. Within the filing, Evergrande Group is seeking the court’s approval to restructure more than $19 billion in the company’s offshore debts.
Later this month, Evergrande’s creditors will vote on the company’s restructuring proposal, with possible approval by Hong Kong and British Virgin Islands courts in the first week of September.
Chapter 15 is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In general, it aims to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country.
Once a foreign entity files for bankruptcy under Chapter 15, the US bankruptcy court can authorize the appointment of a trustee or examiner to act in the other country on behalf of the bankruptcy estate in the United States. Besides, Chapter 15 allows US courts to offer additional aid to foreign representatives, assistance to foreign companies filing bankruptcy cases when the laws of the foreign court may be lacking, and gives foreign creditors the right to participate in bankruptcy cases in the US.
Evergrande’s affiliate Tianji Holdings and the company’s subsidiary Scenery Journey have also filed for Chapter 15 protection.