China Evergrande nears its make-or-break moment

China Evergrande (OTCMKTS:EGRNF) could be forced to wind down its operations this month, in one of the biggest corporate failures in modern times. The company, which was once the biggest real estate developer in the country, has failed to reach an agreement with its creditors.

Evergrande could be forced to wind down

Evergrande has become an emblematic failure in China. In the past few months, the company, which has over $300 billion in liabilities, has been negotiating with its bondholders on the best course of action. Now, it seems like the company could be approaching its end.

March will be a pivotal month for Evergrande as a judge could order the firm to be wounded up. This happened as the company has failed to reach an agreement with bondholders, who are being represented by Moelis and Kirkland & Ellis. Evergrande is being advised by Houlihan Lokey, which I wrote about here. 

According to WSJ and Bloomberg, talks between the two sides have reached a dead end. And with the March 20 deadline nearing, we could see one of the biggest corporate collapses in modern times. 

The reports cited the main issues to be the value of the company’s non-real estate units like its electric vehicle manufacturing business. There is also a disagreement of the company’s property management arm, which it owns about 60%. 

There are other issues hindering a deal between Evergrande and its creditors. For example, there is the structural seniority of the company’s debt. This is important since it affects the creditors’ access to the company’s assets in case of a default. 

A likely outcome, which Evergrande has support is swapping some of this debt into stock of the two operating companies. Also, the creditors are pressing the company’s CEO and founder to inject about $2 billion in the company.

Evergrande stock can’t be traded

It will be almost impossible for traders to take advantage of the expected volatility when the court delivers its verdict in March. That’s because Hong Kong authorities decided to suspend the stocks from being traded in March last year. The measure was meant to protect investors from the expected volatility,

It is still not possible to predict what will happen to the Evergrande stock. A likely scenario is where the court gives the company more room to negotiate with its foreign bondholders. Another one, which is more drastic, will see the company wound down. This is notable since Evergrande employs over 200k people in China.

Meanwhile, several Chinese real estate stocks like Country Garden and Hung Lung have continued doing well in the past few months.