Source: Financial Association Authors: Wang Haichun, Li Jie

China Evergrande, which was liquidated, has withdrawn its previous bankruptcy protection application to the US court.

“According to the mutual and individual liquidators, legal advisers to the former foreign representatives of the Company, Jingcheng and Tianji submitted documents to the US court on March 22, 2024 to withdraw the respective Chapter 15 applications of the Company, Jingcheng and Tianji.” Evergrande said this in an announcement a few days ago.

Attorney Wang Yuchen, director of Beijing Financial Litigation Law Firm, believes that if Evergrande withdraws the bankruptcy protection application, its debt restructuring will be suspended as a result, which is equivalent to reversing Evergrande's previous coordination with creditors and various other entities and corresponding restructuring plans.

It points out that one of the difficulties of Evergrande's debt restructuring is the complexity of Evergrande's debt. Due to the large size, high amount, and variety of types of debt, this means that Evergrande's debt restructuring plan needs to comprehensively sort out the debt situation, seek solutions and coordinate with creditors, and then determine future restructuring plans.

Why was the application for bankruptcy protection withdrawn?

The reason for Evergrande's withdrawal of this application also starts with the restructuring of foreign debt last year and Evergrande's application for bankruptcy protection in the Manhattan court in New York, USA.

According to Evergrande's overseas debt restructuring plan announced in March last year, Evergrande stated that it has made some progress with the creditor task force on the relevant restructuring and plans to reach a binding agreement on the core terms of the restructuring.

These include US dollar senior guarantee notes with a total principal amount of 13.9225 billion US dollars issued by Evergrande and US dollar senior notes with a total principal amount of 5.226 billion US dollars issued by Jingcheng Co., Ltd. and guaranteed by Tianji Holdings Co., Ltd. The total amount of the aforementioned bonds is approximately US$19.148.5 billion, accounting for about 84.4% of Evergrande's US$22.7 billion foreign debt.

In the package plan proposed by Evergrande for creditors at the time, the main methods were to repay old and debt-for-equity swaps, and a combination of the two. Holders can exchange the debt for new bonds with a longer term, as well as shares in Evergrande Property and Evergrande Auto, two subsidiaries of Evergrande. The new bonds will have a variety of maturities and coupons, as well as conditions such as not paying interest for the first three years.

In August of last year, Evergrande announced that it is proceeding with overseas debt restructuring according to the plan. Since Evergrande Group's US dollar bonds are governed by New York law, the company applied to the US court to recognize the overseas debt restructuring agreement arrangement under the Hong Kong and British Virgin Islands (BVI) legal systems in accordance with Chapter 15 of the US Code. This is part of the normal promotion of overseas restructuring procedures and does not involve bankruptcy applications.

Investment bankers pointed out that according to the relevant provisions of the US bankruptcy law, US bankruptcy courts are allowed to recognize bankruptcy or debt restructuring procedures involving foreign countries, and at the same time, non-US companies can use Chapter 15 of the Bankruptcy Code to prevent creditors from filing lawsuits against applicants or freeze their assets in the US to obtain more time for debt restructuring.

Attorney Wang Yuchen told the reporter that Evergrande previously filed a bankruptcy protection application in the US court, which is beneficial for cooperation between US courts and courts in other countries to resolve Evergrande's asset issues when it involves cross-border and cross-regional bankruptcy proceedings, thereby promoting Evergrande to expand the scope of asset restructuring as much as possible when integrating its foreign assets and debts across regions, preserve its foreign assets accordingly, and avoid repeated falling into debt crises in many countries as much as possible.

However, according to information recently disclosed by Evergrande, due to the appointment of Evergrande's relevant liquidators, it is expected that the relevant agreement arrangements will not be carried out in the current manner.

Why did Evergrande withdraw this application? Investment bankers told the reporter that Evergrande's previously announced plan requires debt restructuring, so it is necessary to apply for bankruptcy protection; however, it seems that the plan has not been implemented; in fact, the restructuring plan announced earlier has failed, so theoretically, the application should also be withdrawn.

“There are prerequisites for applying Chapter 15, but it is currently difficult for Evergrande to meet these prerequisites and should be withdrawn. Furthermore, the application will also generate certain payments. Since it is difficult to implement and the relevant provisions cannot be applied, there is no need to waste a large amount of attorney's fees.” Huang Lichong, president of Huisheng International Finance, said.

A number of analysts said that judging from Evergrande's current situation, its debt restructuring is still facing many difficulties.

Wang Yuchen pointed out that after filing an application for bankruptcy protection with the US judge, Evergrande's business crisis was not significantly mitigated. Evergrande was issued a winding-up order this year, and Evergrande received instructions to resume trading. If Evergrande fails to meet the review guidelines and resume trading within the specified period, it is likely that it will be directly delisted. Furthermore, domestic regulatory authorities imposed heavy penalties on Evergrande's financial fraud. Behind this series of penalties is the intensification of Evergrande's business crisis.

“The chain effects, such as the continued decline in creditors' trust, will have a certain impact on the finalization and implementation of Evergrande's restructuring plan. When Evergrande withdrew its bankruptcy application, it is not ruled out that after synthesizing the circumstances of its negotiations with creditors, local penalties, and the current state of the enterprise, etc., it was discovered that the previous restructuring plan was no longer the best solution for Evergrande. Of course, it is not ruled out that Evergrande already has other better plans after healthy communication with creditors, so it has withdrawn its application for bankruptcy protection. As to whether it is necessary to restart debt restructuring later, start time, start method, etc., it is also necessary to comprehensively formulate corresponding plans based on the new situation.” Wang Yuchen added.

Further reorganization makes it more difficult

What impact will Evergrande's withdrawal of the bankruptcy protection application filed by the US court have on its overseas debt restructuring?

“The Chapter 15 Bankruptcy Act is part of the United States bankruptcy law. It is intended to handle multinational bankruptcy cases and allow foreign companies to be recognized and assisted in bankruptcy cases in the United States. The withdrawal of the application may mean that Evergrande lacks legal protection in the US, and creditors can enforce Evergrande's assets in the US, thereby affecting its global asset protection and debt restructuring process.” Huang Lichong said in an interview with reporters.

It further pointed out that according to the current situation, the probability that Evergrande will achieve overseas debt restructuring is low, and whether it can continue and be successful depends on various factors such as the attitude and support of relevant departments, creditors' cooperation, and asset sales and liquidity improvements.

“On the one hand, the attitude and level of support provided by relevant departments on Evergrande's debt will play an important role in Evergrande's debt restructuring, but the Securities Regulatory Commission's heavy penalties against Evergrande may mean that support in this area is relatively limited at present. On the other hand, Evergrande's debt restructuring requires the consent of all or most creditors, and differences between creditors may complicate the restructuring process. Without a plan accepted by the creditors and the court, it is difficult for the restructuring to continue.” Huang Lichong said.

In response, Shen Meng, executive director of Chanson Capital, also believes that if relevant departments take mandatory measures against Evergrande assets, then creditors' traceable assets for overseas debt restructuring may be reduced. If the amount of assets used for debt restructuring is reduced, the willingness of overseas creditors to accept the restructuring may weaken as a result.

Huang Lichong pointed out that whether Evergrande can increase liquidity by selling assets or other methods is also the key to the success of the restructuring. Given that current asset sales are facing problems such as low market demand and poor prices, this will affect Evergrande's ability to raise capital, and the chances of improving in this regard are currently relatively slim.

Furthermore, analysts believe that the legal and regulatory environment in China and other countries and regions involved in Evergrande will also have an impact on the viability and process of debt restructuring.

“Especially after the withdrawal of the US bankruptcy protection application, Evergrande's ability to handle debt internationally may be limited. Although Evergrande's debt restructuring faces many difficulties, this does not mean that Evergrande's debt restructuring is completely impossible; it's just that the opportunities are very slim.” Huang Licong added.

According to Shen Meng, Evergrande's previous application for bankruptcy protection, as well as the current withdrawal of the application, may all be a game of interest carried out by Evergrande.

“Evergrande previously filed for bankruptcy protection to protect its assets. After Xu Jiayin and most of Evergrande's management were taken away to cooperate with the investigation, Xu Jiayin's ex-wife protected her son's assets through overseas lawsuits, etc., which are probably all signs of a game. However, the recent determination by the supervisory authorities that Evergrande's performance and profits have inflated has put a lot of pressure on Evergrande and may have a certain impact on Evergrande's related debt restructuring arrangements.” Shen Meng said in an interview with reporters.

Shen Meng believes that considering that the protection priority of domestic buyers is higher than that of creditors, and that some assets may be strictly supervised by relevant departments, it is expected that Evergrande's future overseas debt restructuring may be greatly affected, and the game with debt restructuring will continue.

edit/lambor