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In a Hong Kong courtroom, Kaisa Group, a beleaguered Chinese property developer, has informed its creditors that they should not expect to recover more than 5% of their investments in the event of a forced liquidation. This unsettling revelation was made during a hearing concerning a winding-up petition filed by Broad Peak Investment in July. The petition was related to Kaisa's failure to repay onshore bonds amounting to 170 million yuan ($23.28 million).
The plight of Kaisa Group is not unique, as many other Chinese property developers are grappling with winding-up petitions following the real estate sector's descent into a debt crisis in 2021. This crisis led to numerous companies defaulting on their debt obligations. However, thus far, only a small number have been instructed by overseas courts to undergo liquidation.
Kaisa Group has a history of financial difficulties, having been the first Chinese property developer to default on its dollar bonds in 2015, subsequently undergoing a significant restructuring. In the most recent property sector debt crisis, Kaisa again found itself among the early defaulters, adding to the economic burden on China. Despite nearly two years passing since its default on offshore debt, Kaisa has not yet disclosed any plans for restructuring. This uncertainty has raised concerns and apprehension among its creditors.
During the court hearing last week, James Wood, the barrister representing Broad Peak Investment, referred to a statement filed by Kaisa with the court. The statement outlined the grim financial situation of the company. Kaisa's cash-to-short-term debt ratio was reported to be a mere 0.02, indicating severe financial distress. The company is also deemed to be cashflow insolvent. These revelations underscore the depth of Kaisa's financial troubles.
In response to the winding-up petition, Kaisa has taken the stance of seeking its dismissal. The company's lawyer argued that the bond contract falls under mainland Chinese law, and therefore Broad Peak lacks the authority to initiate a winding-up procedure in Hong Kong. Hong Kong, although a special administrative region of China, maintains its own distinct legal system.
Judge Linda Chan, presiding over the case, granted both parties a 28-day period to present new expert evidence addressing the issue of the petitioner's authority to file the winding-up petition. Additionally, she instructed Kaisa Group to provide an update on its progress regarding any potential restructuring before the next hearing, the date of which is yet to be determined.
Kaisa Group is one of China's most significant issuers of offshore debt among property developers, with a staggering $12 billion in outstanding offshore debt. This places it behind only China Evergrande Group, underscoring the broader implications of Kaisa's financial instability for the country's economy and real estate market.
The disclosure of creditors potentially recovering less than 5% in the event of liquidation casts a long shadow over Kaisa Group and the wider Chinese property sector. It highlights the urgent need for solutions and interventions to stabilize a sector that plays a critical role in China's economic landscape.
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