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Evergrande Chapter 15 Bankruptcy Protection: Breaking Down Evergrande’s Bold Move
NEW YORK/HONG KONG, Aug. 18 (Reuters) – In one of the largest debt restructurings in history, troubled developer China Evergrande Group (3333.HK) has applied for bankruptcy protection in the United States as concern about China’s escalating real estate crisis and its effects on the country’s faltering economy deepens.
In an effort to boost flagging activity, China unexpectedly reduced several key interest rates earlier this week. On Monday, it is also expected to lower the rate on prime loans, but analysts say these actions have been too little, too late, and that much more drastic action is required to stop the economy’s downward trend.
After experiencing a liquidity problem in the middle of 2021, Evergrande, once China’s top-selling developer, has evolved into the face of an enormous debt crisis in the country’s real estate market, which makes up around a quarter of the economy.
The developer has applied for protection under Chapter 15 of the U.S. Bankruptcy Code, which protects non-U.S. businesses that are going through reorganization from creditors who want to sue them or seize their assets in the United States.
Two people with knowledge of the situation claim that although the case is procedural, the world’s most indebted real estate developer, who owes more than $300 billion, is required to make it as part of a restructuring procedure under U.S. law.
Bonds, collateral, and buyback commitments totaling $31.7 billion are all part of Evergrande’s restructuring of its offshore debt. Later this month, a meeting about its restructuring plan will be held with its creditors.
Since then, a number of Chinese real estate developers have fallen behind on their responsibilities under their offshore debt, leaving unfinished properties, suffering from declining sales, and losing investor confidence, dealing a blow to the second-largest economy in the world.
The real estate market collapse has also increased the potential for contagion, which might worsen a currently vulnerable industry that has been impacted by weak domestic demand, declining manufacturing capacity, rising unemployment, and weak international demand.
China is aiming for 5% annual growth this year, but more and more experts are expressing concern that it may fall short unless Beijing increases support measures to stop the downturn.
The economic and real estate problems in China, as well as the lack of tangible stimulus measures, have spooked international markets. The third consecutive week of falls for Asian equities was expected to result in a weekly loss of 2.8%. The CSI300 index of Chinese blue-chip stocks fell 0.5%, and the Hang Seng Index of Hong Kong fell further by 1.3%.
At its monthly fixing on Monday, China is anticipated to lower lending benchmarks, with many experts anticipating a significant decrease in the mortgage reference rate to boost credit demand and shore up the ailing property sector.
Due to Evergrande’s default on its loans in 2021 and the $300 billion in liabilities, it was saddled with, a number of other construction businesses also went into default. Analysts have referred to the Chinese government’s approach to Evergrande as a “controlled demolition,” in which authorities let the business continue while guiding it toward a slow collapse.
The business revealed losses of $81 billion for 2021 and 2022 last month.
Companies responsible for 40% of Chinese house sales have defaulted since the real estate debt crisis in China started in mid-2021, according to Reuters. As a result, several homes were left incomplete, and suppliers and creditors were not paid. In China, real estate contributes 25% of economic growth; yet, property investment fell 7.9% in the first half of 2023.
Home purchasers in the second-largest economy in the world are now even more uneasy as a result of Country Garden, another significant developer in China, missing payments on its multibillion-dollar debt.
