China Evergrande Group has sought Chapter 15 bankruptcy protection in New York, a move that protects its U.S. assets from creditors while it works on a restructuring deal elsewhere. The Chapter 15 petition references restructuring proceedings being carried out in Hong Kong and the Cayman Islands. Its Scenery Journey unit also filed for Chapter 15 protection, along with affiliate Tianji Holdings. International debt-restructuring deals sometimes require a Chapter 15 filing while finalizing a transaction. Last year, Beijing-based developer Modern Land China Co also filed for Chapter 15 bankruptcy after filing to repay a USD250 million bond. Evergrande has been working for months to wrap up an offshore debt restructuring plan. Evergrande in April disclosed it did not yet have the level of creditor support needed to implement the plan. In July, it received court approval to hold votes on the deal. Meetings are scheduled for later this month.
Evergrande’s filing comes amid growing fears that problems in China’s property sector could spread to other parts of the country’s economy as growth slows. Since the sector’s debt crisis unfolded in mid-2021, companies accounting for 40% of Chinese home sales have defaulted. Evergrande recently had USD330 billion of liabilities. A late 2021 default triggered a string of defaults at other builders, resulting in thousands of unfinished homes across China. Last month, Evergrande posted a combined USD81 billion loss for 2021 and 2022, prompting investor worries about the viability of the debt restructuring plan it proposed in March.
Meanwhile, the liquidity crisis at Chinese property developer Country Garden Holdings could spill over to its peers, as the values of their collaterals decline and homebuyers become more cautious about purchases, particularly in smaller cities. Developers that are privately run and have high exposure to China’s third and fourth-tier cities will bear the brunt of any contagion risk after Country Garden, once a top industry player, missed USD22.5 million in coupon payments, according to U.S. money manager T. Rowe Price Group and investment bank Jefferies Financial Group. “In the event of a default, other private property developers may also experience collateral damage,” Sheldon Chan, Portfolio Manager at T. Rowe Price said. “The Chinese property sector is anticipated to experience a multi-year structural decline as housing demand shrinks due to factors such as population decline, slower urbanization, and changes in family formation,” he added.
In the bond market, even Longfor Group Holdings, which has the least exposure to smaller cities, is reeling from the Country Garden crisis. Its 3.95% U.S.-dollar bond maturing in September 2029 tumbled further. So far, there is no evidence that suggests the crisis in the property market will be defused any time soon. While China’s top policymakers ditched the slogan “housing is for living, not speculation” at a Politburo meeting in July, there has been no change in the tough restrictions imposed in first-tier cities such as Beijing and Shanghai, which investors say hold sway over China’s property market. The ripple effect from slumping home prices might be bigger than expected, triggering more defaults by developers, falling government revenues, declining wages for government and property sector workers, and weak consumption, Lu Ting, Chief China Economist at Nomura Holdings, said in a report.
Electric-vehicle unit China Evergrande New Energy Vehicle Group announced its own proposed restructuring to reduce debt, calling for a USD2.7 billion debt-for-equity swap, and a nearly USD500 million share sale that would give Dubai’s NWTN a 27.5% stake. Trading in China Evergrande shares was suspended in March 2022, the South China Morning Post reports.
Fewer Chinese cities reported home price increases both in month-on-month and year-on-year terms in July, and residential property prices in major Chinese cities were either flat or down slightly from a month ago. Of the 70 Chinese cities tracked by the National Bureau of Statistics (NBS), 20 reported month-on-month growth in new home prices in July, 11 fewer than a month ago. Measured in terms of year-on-year performance, the number of cities reporting year-on-year price rises was 26, versus 27 in the prior month. In July, new home prices in the 70 surveyed cities saw an average fall of 0.2% from the previous month, which is the second month in a row of declines.
Property investment in China fell 8.5% in the first seven months of 2023 year-on-year. New construction projects were just 37% of the 2019 level; only completions continued to post growth, thanks to ample policy support to finish stalled housing projects.
In a second-quarter survey by the People’s Bank of China (PBOC) of 20,000 depositors in 50 cities, fewer households said they were planning to buy flats in the following three months, with the proportion dipping to 16.2% from 17.5% in a first-quarter survey. Meanwhile, more households expected property prices to fall in the next three months, with the proportion up to 16.5% from 14.4%, the survey found.
