(Bloomberg) -- A China Evergrande Group unit in mainland China has become the target of a liquidation petition, as creditors step up efforts to recover assets from the fallen property giant.
The petition was filed against Guangzhou Kailong Real Estate by Guangdong Vanward New Electric Co. to a court in southern Guangzhou city, according to a Shenzhen stock exchange filing late Wednesday. Fully owned by Evergrande, Kailong has a stake of around 60% in Hengda Real Estate, which is the developer’s main property operation onshore, an exchange filing shows.
The petition underscores the potential for competing claims for the assets of Evergrande, which is now in the process of liquidation in Hong Kong, where it’s listed. While most of Evergrande’s assets are in the mainland, liquidators in Hong Kong are understood to be focusing on offshore assets as likely roadblocks make onshore recovery complicated.
This week, Evergrande’s liquidators made public that they sought to recover $6 billion in dividends and remuneration from defendants including the group’s founder Hui Ka Yan and his ex-wife Ding Yumei. Court documents later showed that liquidators have also started legal actions against its former auditor PricewaterhouseCoopers LLP.
“It’s an all-out asset grab now,” said Andrew Chan, a credit analyst at Bloomberg Intelligence. “Creditors are losing patience and likely breaking ranks.”
The petition against Kailong was over an unpaid investment of 200 million yuan ($28 million) and related interest, according to the filing. Kailong was ordered by an arbitration court to pay Vanward New Electric the investment sum and annual interest of 10%, as well as an arbitration fee of more than 1.4 million yuan. Kailong was unable to make the payment, according to the filing.
Hengda Real Estate said the petition against Kailong won’t affect home delivery and business operations. The delivery rate of Hengda’s property projects has exceeded 86% and is likely to surpass 95% within this year, it said Thursday in a response to Bloomberg News.
In China, if a local court accepts a bankruptcy application, a formal process is triggered leading to either restructuring or liquidation, or a settlement between creditors and the company.
Yet the formal legal process can be slow. In July 2021, a bankruptcy and reorganization application was made against a Chongqing-based developer that Singapore property giant City Developments Ltd. had invested in. A local court accepted the case three months later, but a formal reorganization proposal was only disclosed this year.
The Guangzhou court is reviewing the petition, according to Vanward’s filing.
If Kailong does enter a liquidation process, and if needed, Hengda will “coordinate with the court” on related work, Hengda said.
“The chance that Hengda Real Estate gets liquidated could be slim, given the particularity of the Evergrande issue,” said Yan Yuejin, vice president of Shanghai E-house China Real Estate Research Institute.
Under a liquidation scenario, Kailong’s stake in Hengda will likely be auctioned, leading to a change of holders and affecting subsequent property business.
Should the court accept the petition, that may help to accelerate the resolution of Evergrande’s debt problems from an overall perspective, said Hansen Zhou, a senior partner at law firm Bohe & Hansen.
Still, others doubt a resolution will emerge quickly.
“The Chinese government is aware of the need to sort out the soured debt of defaulted developers,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC. “But it doesn’t appear to be a policy priority.”
--With assistance from Mengchen Lu, Trista Xinyi Luo and Qingqi She.
(Updates with background, analyst comments throughout)
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