Embattled developer China Evergrande Group (3333. H.K.) has filed for U.S. bankruptcy protection as part of one of the world’s most significant debt restructurings, fanned by anxiety over China’s worsening property crisis and its impact on the weakening economy. Evergrande, one of the world’s most enormous debt loads, owes creditors around $31.7 billion and is trying to reach a deal to avoid default. It’s latest filing, which is not a formal bankruptcy petition, seeks to protect its assets in the U.S. while it works on a debt restructuring plan.
In the case of Evergrande, that means seeking Chapter 15 protection under a U.S. law that governs insolvencies involving debt owed to creditors in more than one country. Chapter 15 is designed to speed up the resolution of insolvency cases involving multinationals.
The developer’s massive losses and growing default risk have rattled investors. Evergrande is in the midst of an offshore debt restructuring and has been unable to pay onshore bond coupon payments. In contrast, its soaring offshore liabilities have become a focus of concern. The firm has rescheduled so-called scheme meetings for creditors to discuss its plan but has not yet been able to get the necessary support from creditors to secure a deal.
Evergrande’s troubles have exacerbated a broader crisis in China’s real estate sector, which accounts for up to 30% of the country’s economy and has been hit by Beijing’s crackdown on excessive borrowing by developers to rein in soaring home prices. As a result, a string of defaults and incomplete projects have popped up across the country.
With tepid domestic consumption, faltering factory activity, and weak overseas demand undermining the economy, fears that a property bubble is deflating are roiling markets. That has helped push stocks lower and sparked a selloff in bonds that have been hurt by a strengthening dollar, making foreign-held Chinese debt more expensive to investors.
Evergrande’s bondholders are also worried about a possible spillover from the company’s struggles to other Chinese developers, which have started missing interest payments and showing signs of strain as policymakers try to slow property price rises and curb over-borrowing by real estate firms. Despite 25 years of living in China, I have never witnessed such widespread public outrage as I have seen over the past year over property values and Evergrande’s debt.
