On Monday, a further roadblock to troubled developer China Evergrande Group’s protracted debt restructuring plan revived concerns for China’s crisis-hit real estate market and caused a stock sell-off.

Investor worries were heightened by developer China Oceanwide Holdings’ disclosure in an exchange filing that a Bermuda court had ordered its winding up and appointed joint temporary liquidators.

The most recent developments undid a temporary respite for China’s real estate industry, which makes up about a fifth of the country’s economy, thanks to Beijing’s support policies and two other significant developers reaching debt agreements with their creditors.

After defaulting in 2021, Evergrande, the most indebted developer in the world and the face of China’s real estate crisis, has been requesting creditor approval for an offshore debt restructure.

Evergrande offered choices to offshore creditors under the plan outlined in March, such as converting their debt holdings into new notes with maturities of 10 to 12 years.

In a shocking turn of events, Evergrande announced on Sunday that it was unable to issue fresh debt because an investigation into its primary domestic company, Hengda Real Estate Group Co Ltd., is still ongoing.

Hengda announced last month that the Chinese securities regulator was looking into a possible disclosure law infringement.

Evergrande’s shares experienced their worst one-day percentage decline since August 28 on Monday, falling 21.8% to their lowest closing since September 5. The Hang Seng Mainland Properties Index dropped 4.2%, the most since August 8 in terms of a percentage drop in a single day.

“Hopes of any meaningful recovery for the Evergrande debt holder are vanishing,” said Fern Wang, KT Capital Group senior researcher, who publishes on Smartkarma.

“Yet liquidation is not in the cards for Evergrande, the government’s number one priority is to ensure the timely delivery of pre-sold homes and Evergrande’s liquidation would not help the cause,” Wang added.

Just one week after authorities detained some employees at Evergrande’s wealth management branch, the developer faces a new challenge with the newest obstacle to its debt restructuring strategy.

Evergrande’s $31.7 billion offshore debt restructure, which comprises bonds, collateral, and repurchase commitments, may be one of the largest in history.

In order to wait for the outcome of the developer’s meeting with creditors to vote on its debt restructuring plan, the hearing for a winding-up petition against Evergrande in a Hong Kong court was postponed until Oct. 30 in July.

The time of that meeting is mid-October. The meeting’s outcome and validity are both called into question by Evergrande’s most recent revelation.

The developer might replace the offering of fresh notes with another proposition, however it is unclear at this time.

For the plan to be approved, Evergrande requires the support of more than 75% of the holders of each loan class.

“This will entail more delays, but I wouldn’t say that Evergrande’s restructuring proposal is now dead in the water,” said Sandra Chow, CreditSight co-head of Asia Pacific research, referring to the developer’s inability to offer new notes.

The winding-up petitions filed against Evergrande and Oceanwide are only the latest in a long line of such legal actions brought against developers who were unable to make their debt payments after the industry was rocked by an extraordinary liquidity crisis in 2021.

One of the few court orders against a defaulted Chinese developer in recent years was Oceanwide’s winding up court order, which was issued after it missed certain debt payments.

Consumer confidence in the second-largest economy in the world has been shattered by the incomplete homes and unpaid suppliers left by the Chinese developers’ debt problems. Over the past year, there has been a decline in real estate investment, sales, and new construction starts.

In order to avoid bankruptcy or being forced into liquidation proceedings, many of the delinquent developers have been attempting to obtain permission for debt restructuring proposals from their offshore creditors.

Even while Beijing has taken measures to support the industry and boost demand for real estate, the Evergrande construction comes as top developers like Country Garden struggle to avoid default.

According to the most recent National Bureau of Statistics data, the combined floor area of unsold residences as of the end of August was 648 million square metres (7 billion square feet).

“There might be all kinds of complexities in restructuring/negotiations, other legal issues, but in the end, the key factor will be when and to what extent we will see the homebuyers come back,” said Robert Ciemniak, co-founder of Real Estate Foresight who publishes on Smartkarma.

(Adapted from Investing.com)

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