Unlock stock picks and a broker-level newsfeed that powers Wall Street.Upgrade Now
The Battle for Scraps of Collapsed Developer China Evergrande Is Intensifying
1 / 3
The Battle for Scraps of Collapsed Developer China Evergrande Is Intensifying
Bloomberg News
4 min read
(Bloomberg) -- A year after China Evergrande Group was ordered into liquidation by a Hong Kong court, creditors have yet to pocket a penny from the process.
But behind the scenes, the battle for scraps from one of the world’s biggest corporate implosions is intensifying.
Oaktree Capital Management LP, run by billionaire Howard Marks, is maneuvering for advantage by seeking claim to Evergrande assets outside the Hong Kong liquidation process, according to people familiar, who requested not to be named because the matter is private.
Oaktree nominated its own liquidators to go after offshore subsidiaries that have more direct ownership of assets, the people said. The move, if successful, could give the US distressed-debt investor an edge when negotiating for returns related to the assets, the people added.
It would also put Oaktree on a potential collision course with Alvarez & Marsal Asia managing directors Edward Middleton and Tiffany Wong, the Hong Kong court-appointed liquidators that represent all the creditors of the parent group.
On Thursday, the duo will go on a full-day hearing to seek the court’s guidance on the formation of a committee of inspection (COI) that would streamline the winding up procedure. They will seek the court’s direction on the criteria to determine the eligibility for membership of that entity.
The maneuvering over Evergrande underscores the challenges of clawing back assets involving hundreds of entities at a property developer that once faced $300 billion in liabilities. Adding to the complexity, most of Evergrande’s assets in mainland China remain difficult to reach even for the court-appointed liquidators, due to Hong Kong’s separate legal system.
The protracted liquidation — which some insolvency experts estimate could drag out for more than a decade — serves as a case study for the slew of Chinese property giants facing a similar fate and their global investors.
Committee of Inspection
If a COI is formed, the liquidators can consult this body, instead of going to a judge or all the creditors every time.
Yet even if the entity is approved, firms would still be able to go it alone and name their own liquidators in other jurisdictions to go after assets at the subsidiary level.
Oaktree did just that in the British Virgin Islands with a unit that had closer control of some assets. Oaktree-nominated liquidators told the Hong Kong-court appointed ones to consult them first if they act on shares in Evergrande’s property service business, according to people familiar. That services business still has about HK$8 billion ($1 billion) in market value, compared with just HK$2 billion for the parent company.
It’s not uncommon to have different liquidators going after a company through its various entities even after the court appoints one for the parent firm, said Foreky Wong, founding partner at Fortune Ark Restructuring Ltd., a Hong Kong-based firm. It wouldn’t be surprising if a third or fourth one joins the race to reclaim assets, Wong said.
Clawing Back Money
In their efforts to claw back money, the court-appointed liquidators have cast a wide net, though the funds will be first used to support the winding up procedure and a handful of legal battles — part of the reason creditors haven’t received a dime.
It has yielded some results: A collection of art work that includes pieces by Monet and cars including Mercedes-Benzes have been sold, according to people familiar.
The liquidators also took control of more than 100 direct or indirect subsidiaries in the group, according to people familiar. They have wound-up two key units CEG Holdings BVI Ltd. and Tianji Holding Ltd., and taken control of Evergrande Health Industry Holdings Ltd., which owns more than 50% of the company’s new energy vehicle business.
Alvarez & Marsal is also trying to reclaim money from Evergrande founder Hui Ka Yan and his ex-wife, and even from the developer’s auditor PricewaterhouseCoopers LLP.
China Challenges
One of the biggest problems facing offshore creditors is that Evergrande’s mainland assets mostly remain out of their reach. As a Hong Kong court ordered the liquidation, additional arrangements are needed to enforce the ruling across the border, due to the city’s separate legal system.
While Hong Kong and mainland China expanded their reciprocal enforcement agreements in January last year for a broad range of issues, few success cases have been documented.
“Overseas liquidators are still a stranger to mainland Chinese courts and judges and they still have concerns that actions taken by offshore liquidators may disrupt and trigger social instability due to different culture and legal systems,” said Glen Ho, a leader of the restructuring and turnaround practice at Deloitte LLP.
Oaktree and the Hong Kong court-appointed liquidators declined to comment. Evergrande didn’t respond to emailed requests for comment.
A previous analysis by Deloitte estimated the recovery rate for offshore unsecured creditors stood at just 3.53%.
“It’s a massive liquidation,” said James Wood, a Hong Kong barrister who specializes in restructuring and insolvency cases. “This is going to be a long, complex, time-consuming process.”
