Rising tide of winding-up petitions against Chinese property developers

Welcome to the August edition of the R&I Update.

Also in this edition:

• English court makes largest ever wrongful trading award against former BHS directors.
• The clash of insolvency and arbitration: Salford Estates overturned.
• German court denies the possibility of avoidance against guarantor due to release from guarantee obligation.

There have been a growing number of winding up petitions presented against Chinese property developers before the Hong Kong courts in recent months. Kaisa Group Holdings Ltd, a major Chinese developer, recently secured a seven-week extension from a Hong Kong court, postponing its winding-up hearing to 12 August 2024. 

Background

Facing nearly US$13 billion in offshore debt, Kaisa failed to repay creditors on its outstanding offshore bonds and accrued interests, triggering cross-defaults. Kaisa must make substantial restructuring progress by the postponed hearing date to avoid liquidation. 

China’s property development industry's insolvency crisis

Kaisa’s struggles reflect the challenges faced by Chinese property developers at large.  

• Historically, Chinese property developers relied heavily on highly leveraged debt financing, leading to increased financial vulnerability and insolvency risk. 
  
• The “three red lines” policies introduced in August 2020 restricted the ratio of debt to cash, equity and assets, which exerted liquidity pressure on developers to fulfil their repayment obligations.
• The drop in property sales during the pandemic further exacerbated the financial pressure faced by developers as seen with Kaisa and other Chinese property giants such as China Evergrande and Country Garden.

China Evergrande Group, once a colossal name in the real estate industry, was ordered to be wound-up on 29 January 2024 after failing to repay over HK$862 million debt. Country Garden Holdings Company Limited, another heavyweight in the Chinese property market, has recently secured a fourth adjournment of a winding up petition after defaulting on a term loan facility of approximately HK$1.6 billion.

Navigating Debt Crisis

Evolving market conditions and a rapidly changing regulatory environment present unique challenges for both lenders and borrowers. Borrowers can strive to maintain a healthy financial position by engaging in proactive debt management strategies, such as debt restructuring. Meanwhile, lenders must implement robust due diligence and protective measures to effectively manage default risks.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring and Insolvency team.