China Evergrande Shelves Restructuring Plan As The Threat Of Liquidation Edges Closer

China Evergrande Group is now facing major uncertainties in its efforts to restructure its international debt, and the clock is ticking on embattled billionaire Hui Ka Yan to find a solution as the next hearing for a winding-up petition against the company is scheduled in about a month’s time.

Evergrande, which first unveiled the key terms for restructuring its offshore debt in March, now says it can’t issue new notes as originally planned because an onshore subsidiary is under investigation for an unspecified matter, according to a late Sunday filing to the Hong Kong Stock Exchange. And just two days ago, the beleaguered developer cancelled a creditor meeting while saying in a separate filing that debt holders should reassess the restructuring terms as property sales haven’t met expectations.

An Evergrande spokesperson didn’t respond to messages seeking comment. With a total of $327 billion in debt, the company faces a hearing on October 30 in Hong Kong to wind up the firm. The mounting obstacles in its restructuring process is now weighing heavily on broader investor sentiment, with property developers slumping across the board on Monday.

But Shen Meng, a Beijing-based managing director at boutique investment bank Chanson & Co., says there is still an incentive to push the restructuring forward, as liquidating Evergrande would leave creditors even less to recover. Plus, it may complicate the delivery of pre-sold apartment projects, which remains a key priority for government officials as they seek to protect average homebuyers and avoid social unrest.

“The prior offer had yet to be accepted and prospects were uncertain, but the underlying need for restructuring remains unchanged,” says Brock Silvers, the Hong Kong-based chief investment officer at Kaiyuan Capital. “Relevant parties have little choice but to coalesce around a deal. ”

So far, support from one creditor group has been falling short. Investors holding 30% of its Class C debt have backed the deal, according to the company’s last update in April. Evergrande needs approval from at least 75% of creditors holding each class of debt to agree before implementing the restructuring scheme. Its plan offered them the option to convert their current holdings to new notes with maturities of up to 12 years, or a basket of financial instruments linked to shares of the company itself, its EV unit China Evergrande New Energy Vehicle Group and its property management arm Evergrande Property Services Group.

But amid China’s deepening real estate crisis, Evergrande’s Hong Kong-listed shares have been sliding ever since trading resumed this August following a 17-month suspension. And its EV unit has so far failed to establish a foothold in the market, delivering less than 1,000 cars in the first half of 2023.

Evergrande’s troubles have also been piling up in the legal arena. In mid-September, police in the tech hub of Shenzhen detained some staff at Evergrande’s wealth management unit without disclosing any charges. The wholly owned unit had issued about $5.6 billion worth of wealth management products, which were bought by investors including average Evergrande employees as the firm tapped them for funding as well.

Now, the focus will be on whether the embattled Hui may substantially change the original restructuring plan–including using his personal wealth of $3.3 billion to help pay down debt. In deals like this, creditors tend to push for founders to contribute from their own pockets, according to a person with knowledge of the matter, adding that the deal “will get done in some form.”