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A key group of offshore bondholders of China Evergrande plans to join a lawsuit seeking to liquidate the company at a hearing in a Hong Kong court on Monday, according to a report from Reuters.
The bondholder group, which owns more than $2 billion in offshore bonds guaranteed by Evergrande, is supporting a liquidation petition against the world's most indebted construction company. Sector lawyers said that this move increases the possibility of a quick liquidation decision from the court.
If a liquidation order is issued, an interim liquidator will be appointed, followed by an official liquidator, to take control and prepare to sell the company's assets to repay its debts.
If the liquidators decide the company has sufficient assets or a surprise investor shows up, they could propose a new debt restructuring plan to offshore creditors who owe $23 billion in Evergrande. They will also investigate the company's activities and may refer suspicions of executive misconduct to Hong Kong prosecutors.
Evergrande may appeal the liquidation decision, but the liquidation process will continue until the appeal. It is unclear whether trading in Evergrande shares will be suspended following the liquidation decision. Listing rules require a company to demonstrate a business structure with adequate operating and asset values.
At a hearing in a Hong Kong court in July, Evergrande cited a Deloitte analysis that predicted a 3.4% recovery rate if the company was liquidated.
But creditors now expect a recovery rate of less than 3% after Evergrande announced in September that its flagship unit and its chairman, Hui Ka Yan, were being investigated by authorities for unspecified “illegal offences”. Evergrande's dollar bonds sold for about one cent on the dollar on Friday.
Most of Evergrande's assets have been sold or seized by creditors, leaving two Hong Kong-listed units: Evergrande Property Services Group and Evergrande New Energy Vehicle Group. The total market value of these units had fallen to $973 million as of Friday.
Liquidators could sell Evergrande's shares in these two units, but finding buyers would be difficult. Following the liquidation, liquidators could take control by replacing the legal representatives of Evergrande's mainland Chinese subsidiaries one by one, a process that could take months or years.
Experts say that the liquidation of the company, which has $240 billion in assets, could create shock waves in the already fragile capital markets, while noting that it will not provide a plan for how the liquidation will occur for other struggling construction companies.
In addition to the case scheduled for hearing at 7 a.m. (UTC+3), Judge Linda Chan will hold a rare hearing on a possible “regulatory order” at 12 p.m., according to information on the city's judicial website.
*This is not investment advice.