After China Evergrande (hereinafter referred to as Evergrande) issued the liquidation order, the outside world launched a comprehensive discussion on the giant company, the most critical of which is what the company will go through in the next stage, which assets will be disposed of, and how will it end?
In order to better sort out the next step of Hengda, Blue Whale Finance and Huisheng International Capital President Huang Lichong, who has many years of experience in workout and bankruptcy reorganization, made in-depth exchanges and detailed combing.
The Hong Kong court issued a winding-up order to China Evergrande, the Hong Kong-listed platform with the stock code 03333.hk, which means that the company to be wound up is also an asset at the level of the listed platform, including the sale of shares held in subordinate "subsidiaries" and the potential liquidation (if found to be of material economic significance).
After the appointment of the liquidator, the work of the liquidator will also be carried out around the listing platform, including the disposal of physical assets, brands and intangible assets, but it is not responsible for solving the problems of all its subsidiaries, which is not a matter for the liquidator to consider. The matter for the liquidator to consider is how to get the most debt recovery for the creditors of the listed company. The recovery of shareholders will not be given priority. According to Evergrande’s situation, if there is no workout, the shareholders will basically have zero recovery.
What is winding up? Who does the liquidator serve?
This is the first step in understanding Evergrande’s next direction. According to Huang Lichong, the so-called liquidation means that the liquidation officer will dispose of the assets of China Evergrande listed companies after confirming that Evergrande is bankrupt, including valuable assets and the equity of its subsidiaries. However, from an "economic" perspective, only some assets and equity that can bring income to creditors will be dealt with, and the part that cannot bring debt recovery will not be cleaned up first. Whether to clean up without bringing debt recovery depends on the responsibility given to the liquidation officer by the court.
Liquidation and Bankruptcy. Conceptually, one is a means and the other is a legal definition. Liquidation is the process of closing down a company, in which the company’s assets are sold to repay debtors. This forced liquidation occurs when creditors, courts, or other interested parties demand that the company be dissolved. The ultimate purpose of liquidation is to end the existence of the company, realize the company’s assets, and distribute them to creditors in accordance with legal priority. Bankruptcy is a legal process that often involves the forced liquidation of a company, in which the company ceases operations and its assets are sold to pay off its debts.
The liquidator did not liquidate the assets of Hengda’s listed company at all levels, and liquidating the parent company did not mean that the subsidiary would be liquidated. The subsidiary would only be sold or apply for voluntary liquidation if the creditor recovery was increased. Because the liquidator’s responsibility was only to recover the last valuable assets for his creditors and shareholders, the subsidiary without recovery value would not be touched.
If the liquidated assets have no recovery value, but instead generate a lot of costs for the subsidiary, there will also be a statutory liability issue for the liquidator. The liquidator cannot spend too much of the liquidated company’s funds to bring valuable recovery to creditors.
In the process of disposing of assets, it is necessary to consider the cost comprehensively and maximize the return of creditors. The interests of Hengda equity holders are among the secondary considerations. This is the test of the liquidator. He needs to weigh which assets are worth clearing and find the corresponding receiver.
According to public information, Alvarez and Marsal, the liquidator appointed as China Evergrande, is an internationally renowned enterprise rescue and liquidation company.
After the appointment of a liquidator, what assets can he dispose of? Does he have the right to dispose of domestic assets?
Huang Lichong said that although the liquidator theoretically has the right to appoint directors of subsidiaries and then appoint directors of next-level companies to deal with all domestic and foreign assets of Evergrande, it must be sorted out according to the equity ownership relationship, and the creditor’s rights of non-listed companies can be repaid according to each level before distribution.
From the perspective of liquidators, they mainly serve the creditors of listed companies, considering that the assets that can be distributed to shareholders or creditors after liquidation may mainly come from overseas rather than domestic. Because most of the assets in China are mortgaged or preserved by domestic creditors, even if someone takes over, after distributing them to secured debtors and non-mortgaged domestic creditors, the assets that can achieve income distribution are estimated to be very small, or even zero.
For projects with ownership in China, the liquidator will send a letter informing them that the sale, disposal or major decisions of assets must be approved by the liquidator, but generally will not interfere with or even participate in the operation of domestic projects.
Huang Lichong believes that although Hengda has said that it will steadily promote the normal operation of the group’s business, after the liquidation order is issued, it will definitely have an impact on Hengda’s business operation. In the future, project companies in various regions can only seek "self-help" and "self-governance", and the flexible capital scheduling support from the group will be reduced. Coupled with the blessing of the liquidation order, the initiative and enthusiasm of Hengda’s management may be affected, and the layoff of redundant employees will also be accelerated.
How to deal with the subsidiaries of listed companies that cannot be sold by the liquidator in the future?
Mr. Huang said the assets could be wound up voluntarily and a new liquidator appointed by the court. He did not rule out a future workout with domestic creditors with the support of white warriors at the subsidiary level, and finally out of the control of China Evergrande.
Regarding China Evergrande’s Hengda property and Hengda Automobile, Huang Lichong said that property companies are likely to seek a sale, and Hengda Automobile may find it difficult to find a takeover target in the current environment, and it is difficult to say whether it will eventually follow in the footsteps of China Evergrande.
Huang Lichong pointed out that according to the bankruptcy liquidation schedule of Shenzhen Guangyao Group, the former took seven years, while for China Evergrande, which has a large amount of debt and a complex structure, the time to complete the liquidation will undoubtedly be longer.
Data show that as of the first half of 2023, Hengda’s total debt was 2.3882 trillion yuan, excluding the advance payment of the debt was 1.7842 trillion yuan, and the total assets were 1.7439 trillion yuan.
Huang Lichong estimates that after the entire Hengda Group is completely liquidated, Hengda’s relevant stakeholders, including suppliers, joint venture shareholders, shareholders of listed companies and various groups and group subsidiaries, after creditors recover the remaining value, including the previous share price loss, the estimated cumulative loss may reach 2.50 trillion yuan.
