Will the #Evergrande never-ending story finally come to an end tomorrow, or will the #HongKong Judge, Justice Linda Chan, adjourn the hearing for the 8th time in the hope that a miracle suddenly strikes #Evergrande from the skies and fixes the whole mess?
If the hearing is adjourned again, not only Evergrande and its creditors, but the whole Chinese Real Estate sector will remain in limbo with no escape routes for all those stuck inside there. Let’s be honest, this is what almost everyone entangled in this mess hopes for:
- The company will continue to operate in a zombie mode without needing to face the consequences for its reckless past.
- Creditors will not “lose” money in their Balance Sheets that will keep showcasing unrealistic mark to markets for assets linked to Evergrande and other similar borrowers in trouble.
- The judicial system in #HongKong won’t risk being blamed for initiating the domino that triggers a credit event of unpredictable consequences.
- The government in #China won’t be made very upset because both their latest stimulus efforts and the incoming Chinese new year holidays will likely be spoiled by an Evergrande liquidation.
If Justice Linda Chan instead rules for the immediate liquidation of Evergrande, what is going to follow will be worth a huge bucket of 🍿
STEP 1 – Immediate Actions
- The court appoints an official liquidator who takes control of the company.
- Trading on Evergrande #stocks will be suspended again.
- Evergrande bank accounts will be immediately frozen.
STEP 2 – Liquidation Process
- The official liquidator will be required to certify all assets and liabilities of Evergrande.
- Creditors will then submit their claims and they will be ranked based on their legal status.
So far, 2 types of creditors have been identified, those belonging to Class A (senior dollar notes, Hong Kong dollar-denominated convertible bonds and one private loan) and those belonging to Class C (private loans, repurchase obligations and guarantees provided by the company). - The company liquidator then starts to sell all assets in an orderly manner and through all possible means available to maximize their value.
- Employees of the company will all be terminated and their salaries and severances will have the highest repayment priority in the liquidation process.
- Once all debts are settled and assets liquidated, the company is formally dissolved and removed from the Companies Register.
Personally speaking, I will be very surprised if there isn’t another adjournment considering all I described above because, in the case the court rules in favor of a liquidation, the effects of $300bn+ of debt going officially puff 💨 will surely leave a bad scar on many banks’ loan books across the world.
Furthermore, assuming the accounting rules and risk regulations are applied as they should, banks will not be able to justify any more assets held at book value in their HTM books starting from everything related to Evergrande sphere (not only the company but also its suppliers and customers currently paying a mortgage on homes they will hardly ever live in). If the debt related to the company itself is $300bn, you can easily add $100-200bn on top of that in terms of overall credit suddenly going ☢️
As if all I mentioned wasn’t enough, it goes without saying that it will be much harder for other real estate developers in trouble to stay away from the spotlight. Overall, the potential credit bust domino that Justice Chan can set in motion could potentially be of biblical proportions and will severely undermine China efforts to convince investors to come back.
Frankly speaking, if the plug is pulled from Evergrande, the event has all the characteristics to become an avalanche that impacts markets in the same way Covid-19 did.👀
