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Global markets rattled as China Evergrande files for bankruptcy protection

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2023-08-18

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Global stock markets are set to experience turbulence following the news that the beleaguered Chinese property behemoth, China Evergrande, has filed for bankruptcy protection in a New York court.

Hong Kong markets, already at 9-month lows, are bracing for further declines today due to this development. Evergrande had previously disclosed a staggering $270 billion in debts in a restructuring blueprint unveiled earlier in 2023.

Investor concerns have heightened over the past fortnight due to troubles faced by another developer, Country Garden. Additionally, worries about asset managers defaulting on some of their products surfaced this week, triggering declines in Hong Kong and mainland China shares.

The predicament faced by Country Garden has already inflicted damage on foreign investors and markets across the US, several European regions, and Australia.

Now, Evergrande, which encountered financial distress just about two years ago when it defaulted on foreign debt payments amounting to hundreds of millions of dollars, is reportedly attempting to piece together a restructuring plan. The viability of this plan is crucial; it should be credible rather than a maneuver to evade genuine restructuring that could potentially favor insiders.

Reuters and Bloomberg have reported that Evergrande aims to safeguard its US assets from creditors while actively pursuing a restructuring arrangement elsewhere.

Evergrande's Chapter 15 filing refers to ongoing restructuring procedures conducted in Hong Kong and the Cayman Islands.

Its subsidiary, Scenery Journey, has also sought Chapter 15 protection, along with affiliated entity Tianji Holdings.

In July, Evergrande disclosed a shareholder money loss of $81 billion in 2021 and 2022, according to a stock exchange filing. The filing further unveiled that Evergrande's total debts had surged to 2.437 trillion yuan ($340 billion) by the end of the previous year, a significant increase from $313 billion at the close of 2021.

In March of this year, Evergrande introduced an extensive restructuring strategy to settle its international creditors. The conglomerate's liabilities exceeded $270 billion, rendering this debt restructuring blueprint the largest in China's history.

The current filing appears to be a continuation of this effort.

Bloomberg noted that international debt-restructuring deals often necessitate a Chapter 15 filing during the finalization of transactions.

"Last year, Beijing-based developer Modern Land China Co. also filed for Chapter 15 bankruptcy after failing to repay a $250 million bond and expressing its intention to proceed with an offshore debt restructuring deal."

US analysts have indicated a lack of clarity regarding the parties that will bear the brunt of losses stemming from the Evergrande restructuring, and the prospects of its success remain uncertain. It is anticipated that various entities in China and foreign financiers will have to share in these losses.

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