A growing number of frustrated creditors are filing winding-up petitions against Chinese developers, with an unprecedented four cases coming before the Hong Kong courts last week.
The surge in litigation is partly down to a strategic move by creditors to use the threat of liquidation to secure a better deal and recover more of what they are owed in a deteriorating market, according to restructuring advisors and lawyers.
The list of Chinese home builders facing liquidation lawsuits is growing longer. Kaisa Group Holdings, Shimao Group Holdings, Redsun Properties and DaFa Properties faced wind-up hearings in Hong Kong in the last week, a record for the sector.
While all of them have been granted temporary reprieves ranging from four weeks to seven weeks, some remain exposed to the risk of liquidation – Kaisa was warned there is “no excuse” for another adjournment if no progress is seen before the next hearing.
Dexin, a medium-sized developer based in eastern China’s Zhejiang province, was ordered to liquidate earlier in June by a Hong Kong court after it failed to make debt repayments in time.
Sino-Ocean, a state-backed developer, received a petition on Friday, while Country Garden Holdings, once the biggest Chinese developer, faces its next court hearing within four weeks.
A worsening macroeconomic environment is prompting offshore creditors to hasten restructuring efforts, triggering a surge in lawsuits as declining property sales erode asset values, according to industry experts.
“A trend we’ve observed is that almost all the restructuring terms are worse than they were three years ago, from debt-exchange offers, debt-to-equity swaps and issuances of new bonds, to direct haircuts [a reduction in the debt to be repaid],” said Glen Ho, national turnaround and restructuring leader at Deloitte, who is advising on several cases involving property firms.
“The current recovery rate [of a liquidation] is alarmingly low, often in the single digits and sometimes as dismal as 3 to 5 percent. We expect there to be a second wave of debt restructurings from 2025 onwards [as there will be] no significant improvement in sales or the confidence of home buyers.”
The real estate sector has been at the forefront of bond defaults in China, with 59 issuers defaulting on 319 offshore bonds and 49 defaulting on 194 onshore bonds since the introduction of Beijing’s “three red lines” policy in 2020, according to an analysis by S&P.
A liquidation petition may disguise the real intention of creditors. They often file such petitions to “exert pressure” on defaulting property developers to improve the restructuring terms, according to Lance Jiang, a partner at law firm Ashurst.
“The liquidation hearings can prompt the management to make improvements to their business operations and present progress on their restructuring plans to calm aggrieved creditors,” he said.
“Ultimately, it is a tactic that is used by creditors when they’re frustrated with the process or the pace of progress or negotiations, it is something they will rely on,” said Ron Thompson, managing director at global consulting firm Alvarez & Marsal (A&M) Asia.
“The winding-up suit is a threat. But will creditors actually pull the trigger? Most likely not. A lot of times the hearings are adjourned because the company is engaging and the real intention is not to wind up the company, it is to get a restructuring deal in most cases.”
The essence of restructuring is “how to split the pie and how big it is”, Thompson said. But, the reality creditors need to face in the current climate is that “the pie is getting much smaller than it used to be”.
