Analysis – Deals with China Evergrande subsidiaries boost outlook for offshore lenders By Reuters

By Xie Yu and Clare Jim

HONG KONG (Reuters) – China’s offshore lenders Evergrande (HK:) could boost its chances of recovering funds if it can prove the property developer is receiving money from onshore subsidiaries to which it is entitled, experts said.

Those creditors became de facto shareholders of Evergrande’s onshore assets due to a January winding-up order in Hong Kong, giving them another way to recoup money from a firm whose offshore liabilities stood at just $23 billion .

Shareholders have the least seniority in debt recovery. However, in the case of two electric vehicle (EV) units and a real estate unit, they could be considered senior creditors if the court-ordered reorganization of the former and liquidation of the latter reveal that the respective subsidiaries have outstanding loans from China. Evergrande.

“Offshore creditors who can prove that Evergrande lent money to these onshore restructured businesses have the legal right to claim the money back based on experience,” said Glen Ho, Deloitte China’s national reorganization and restructuring leader.

Ho cited a case involving his team in which China Huishan Dairy’s offshore creditors received payments by restructuring onshore subsidiaries that had borrowed from the parent company.

Creditors of Evergrande units – including Evergrande itself, if there are outstanding loans – must report details of money owed before creditors’ meetings on October 22 for Evergrande New Energy Vehicle (Guangdong) and Evergrande Smart Automotive (Guangdong), and November 14 for Guangzhou Kailong Real Estate .

Evergrande’s liquidators – appointed by the Hong Kong court to represent offshore creditors – declined to comment. Its flagship onshore operation, Hengda Real Estate, declined to comment.

Calls to the Guangzhou Intermediate Court, which oversees the subsidiaries’ cases, went unanswered.

The possibility of Evergrande’s offshore lenders clawing back funds through subsidiaries adds another chapter to the fall of what was once China’s biggest real estate conglomerate.

It also raises the possibility that offshore lenders could file evidence of debts between Evergrande and other subsidiaries and pursue funds in efforts to restructure those units, experts said. Even so, recovery will be challenging, they said.

“The process will be long and it will be difficult to navigate the mainland restructuring process,” Ho said.

The Hong Kong ruling designating offshore shareholders – through liquidators – as shareholders of onshore assets is not automatically recognized in mainland China.

Moreover, by being designated de facto shareholders of the subsidiaries, offshore creditors rank below onshore ones, so they will struggle to recover anything, said a Hong Kong-based restructuring expert, who declined to be identified because he was not authorized to speak to mass media.

In both onshore and offline legal cases, creditors’ interests could conflict as they pursue the same assets.

For example, the reorganization of electric vehicle units is likely to disrupt a deal announced by Evergrande’s liquidators in May to sell the property developer’s stake in Hong Kong-listed China Evergrande New Energy Vehicle, analysts said.

Still, it’s important for offshore investors to be involved in government-led bankruptcy processes and to ensure those processes are transparent, said Qiao Shitong, a property law professor at Duke University Law School.

“Letting the court deal with such complicated cases and ensuring that procedures are followed in the spirit of justice is more important than who gets what,” he said.