China Evergrande Group, the most indebted real estate developer in the world, is attempting to stave off a possibly impending liquidation with a last-minute debt restructuring proposal, according to a report from Reuters quoting information from persons with firsthand knowledge of the situation.

A judge stated last month that the failed company, whose earlier plan had expired, had until a hearing in Hong Kong on Monday to provide a “concrete” fresh debt restructuring proposal for offshore creditors.

However, the sources—who wished to remain anonymous because the discussions are private—told Reuters that given the poor chances for recovery and mounting worries about the developer’s future, creditors were unlikely to approve Evergrande’s latest offer.

Evergrande, which has liabilities totaling over $300 billion, is a prime example of the problem facing China’s real estate industry, which accounts for 25% of the country’s second-largest GDP in the world.

Governments have rushed to assist the industry as troubled developers’ problems rocked international markets.

A request for comment from Guangzhou-based Evergrande, which went into default on its offshore loans in late 2021, was not answered.

Evergrande this week reportedly offered to convert some of the debt held by offshore creditors into equity in the company and two Hong Kong-listed units, and to repay the remaining debt with non-tradeable “certificates” backed by offshore assets, ahead of the hearing when the Hong Kong High Court will rule on a liquidation petition.

According to one of the two reports, the offshore assets comprise the developer’s receivables and minority interests in other businesses; Evergrande would redeem the certificates upon the assets’ successful disposal.

According to him, Chinese officials have prohibited the developer from issuing additional bonds, thus regulatory permission is not expected to be needed for this plan.

In addition to the October offer of 30% shares in each of Evergrande’s two Hong Kong subsidiaries, Evergrande Property Services Group and Evergrande current Energy Vehicle Group, that was previously disclosed by Reuters, the current plan offers creditors a 17.8% stake in Evergrande, the person added.

According to insiders, a number of creditors were not happy with the terms from October as they suggested a significant reduction in investments. As a result, Evergrande may have had to rush to sweeten the agreement in an effort to stave off insolvency.

With property sales stagnating and hundreds of thousands of unfinished homes around China, the prospect of a disastrous collapse of Evergrande has been a big source of fear for investors around the world.

The debt problems of industry titans like Evergrande and Country Garden have caused instability in the sector, thus the Chinese government has launched a series of measures to stabilise it (2007.HK).

Towards the end of September, Evergrande said that billionaire founder Hui Ka Yan was being investigated for “illegal crimes” that were not described, which ruined the company’s hopes of restructuring its debt.

As part of the restructuring plan, the developer was prohibited from issuing dollar bonds, and regulators opened an inquiry into its flagship mainland company.

In the event that the Hong Kong court orders Evergrande’s liquidation, the company’s assets will be sold to pay off its obligations, and first an official liquidator will be appointed to take over.

This would include selling its onshore assets in addition to the shares of its two Hong Kong-listed units, which restructuring experts warn could present substantial hurdles.

Last month, the Hong Kong court was informed by an attorney representing an ad hoc group of significant offshore bondholders that the restructuring plan might result in a higher recovery rate for creditors than liquidation, where they would receive less than 3% back.

Nevertheless, according to two additional sources, the group has designated consulting firm Alvarez & Marsal as its preferred liquidator, given that creditors foresee Evergrande’s possible liquidation given that the majority of its assets and obligations are located in mainland China.

There were no comments from Alvarez & Marsal.

Top Shine, an investor in the Fangchebao unit of Evergrande, filed for liquidation in June 2022, claiming that the developer had broken a deal to buy back the shares the investor had purchased in the subsidiary.

(Adapted from Reuters.com)