International bondholder and DMSA file an allegation of criminal conduct against defaulted Evergrande Group
For months, China Evergrande Group has been teetering on the brink of insolvency. On several occasions, China’s second-largest real estate developer, which has accumulated more than $300 billion in debt, has defaulted on interest payments on U.S. dollar bonds. Now an international creditor, in cooperation with DMSA Deutsche MarktScreening Agentur GmbH, has filed an allegation of criminal conduct against the Evergrande holding company for committing insolvency fraud.
Things are getting tighter for Evergande: A bondholder, Liechtenstein-based Financial Market Partners Capital (FMPC) Consulting AG, filed an allegation of criminal conduct on Friday, February 18, 2022 for insolvency fraud against the Cayman Islands-registered Evergrande holding company. FMPC Consulting AG was supported and advised – in addition to internationally active insolvency lawyers – by DMSA Deutsche MarktScreening Agentur GmbH.
Background: Evergrande has defaulted on interest payments on so-called offshore bonds amounting to more than one hundred million US dollars on several occasions since mid-November. These are held by international investors, including FMPC Consulting AG. (Note to editors: More about FMPC Consulting AG and its investment in Evergrande bonds can be found at the end of this press release.) On December 3, Evergrande officially admitted to international investors for the first time in an ad hoc announcement to the Hong Kong Stock Exchange – the holding company’s home exchange – that there was “no guarantee that the Group will have sufficient funds to continue to meet its financial obligations.”
If a company domiciled in the Cayman Islands is insolvent or of doubtful solvency, its directors have a fiduciary duty under the laws and regulations applicable there to act in the interests of its creditors. They then also have to consider whether it is in the interest of their creditors to initiate reorganization or insolvency proceedings. As the management of Evergrande Holding has so far failed to initiate insolvency proceedings, there is a strong suspicion that the directors of Evergrande have caused substantial pecuniary loss to the company’s creditors through deception and breaches of their duty of care. Such conduct is punishable, inter alia, under sections 248 et seq. of the Cayman Islands Criminal Code.
DMSA Managing Director Michael Ewy explains, “With the allegation of criminal conduct, we are trying to save what can be saved for FMPC Consulting AG and other international creditors.” At the latest with the official announcement of the default of the interest payment on December 6, 2021, the Evergrande directors had been obliged to file for voluntary or provisional insolvency at the court of the company’s headquarters in the Cayman Islands. “To date, this has not happened despite multiple requests from us. As a consequence, we have now filed an allegation of criminal conduct with the Cayman Islands Public Prosecutor’s Office for committing insolvency fraud.” Thus, he said, it is now also the responsibility of the local authorities to investigate the case and hold the directors personally liable, as well as to have the insolvency determined by the authorities.
The reasoning behind it: “Evergrande has defaulted, but has still not been officially declared completely insolvent,” explains Dr. Marco Metzler, Chairman of the Board of Directors of FMPC Consulting AG. “As more and more distress sales are taking place and overdue bond interest is repeatedly not paid to foreign investors, we had to act in our own interest but also in the interest of all international creditors. If the local authorities do not officially declare insolvency, we intend to file a bankruptcy petition against Evergrande ourselves. This will happen as soon as we have an official, enforceable debt instrument against Evergrande in our hands. Until then, it may take a few more weeks.”
As FMPC Consulting AG sees itself as the trustee of all international Evergrande creditors and in order to reduce the cost risk for each claimant, the company is offering other international creditors to join its proceedings, which took another step forward yesterday with the filing of the allegation of criminal conduct in the Cayman Islands.
Incidentally, Metzler and Ewy are not alone in their view: China Evergrande Group was already officially downgraded to “partially insolvent” by international rating agencies at the beginning of December. Thus, the rating agency Fitch has assigned Evergrande a status of “Restricted Default” (RD). Similarly, rating agency Standard & Poor’s downgraded the real estate developer to “Selective Default” (SD). All 23 of Evergrande Group’s international bonds are affected by this selective default. The only rating worse for both agencies is “Default” (D) – complete default. This rating will be assigned at the latest when the Evergrande Group has been officially declared insolvent by a court.
This is exactly what FMPC Consulting AG and DMSA now want to achieve with their allegation of criminal conduct order to prevent further asset transfers to the detriment of international creditors. The company has already sold shares and assets several times in a distress sale, knowing full well that it was making losses. Worse still, in recent months there have been multiple illegal transfers of assets, causing significant damage to the company’s international creditors, as this illegal action is likely to have severely impacted their chances of recovering their assets.
For example, in November 2021, Evergrande sold its stake in the streaming service provider HengTen Network Group for the equivalent of 273.5 million US dollars. This “gave” Evergrande a loss of the equivalent of 1.09 billion US dollars. Incidentally, the stake was sold at a 24 percent discount to the closing price at the time of the acquisition. As a result, HenTen’s share price plummeted by 24 percent.
In addition, Chinese authorities ordered Evergrande founder and chief executive Hui Ka Yan to sell some of his private assets – including high-end art, calligraphy and three properties – to compensate Chinese Evergrande bondholders. It is feared that this has led to unequal treatment of Evergrande creditors, as it is unclear whether creditors were given preferential treatment.
“In this respect, it would have been best for Evergrande’s international creditors if the group itself had taken action earlier and filed an insolvency petition with a provisional restructuring plan in accordance with the bankruptcy laws of the Cayman Islands,” explains DMSA CEO Michael Ewy. The management of the Evergrande holding company has been guilty of delaying insolvency for some time now.
From Dr. Metzler’s perspective, there is virtually no hope for Evergrande’s turnaround. “The restructuring analysis I have from Fitch Ratings – one of the three largest rating agencies in the world, where I started my career as a financial analyst years ago – assumes that Evergrande would be liquidated with a restructuring rate of zero to ten percent.” That means creditors would get back a maximum of one-tenth of their invested capital.
What’s more: Evergrande is not the only one struggling at the moment. A number of other Chinese developers – such as Kaisa Group, Fantasia Holdings, Modern Land China, and Guangzhou R&F – are also having great difficulty refinancing. Some have also already experienced payment defaults.
No wonder that Ewy and Dr. Metzler consider the insolvency of Evergrande and other Chinese property developers to be inevitable. In their wake, there would then likely be a host of other bankruptcies. “To avoid internal unrest, China would be forced to return to a hard communist line,” concludes Dr. Metzler. This would ultimately imply that all of China’s international debt of around 585 billion U.S. dollars would no longer be serviced and that equity investments by foreign investors of around 600 billion U.S. dollars would also have to be written off completely – with devastating consequences for the global banking system and the entire world economy.
About Financial Market Partners Capital (FMPC) Consulting AG:
Financial Market Partners Capital (FMPC) Consulting AG, is a private investment and advisory firm based in Ruggell, Liechtenstein. As a single family office, FMPC Consulting AG invests exclusively its own funds of its owner, the Metzler family.
About the Evergrande investment of FMPC Consulting AG:
FMPC Consulting AG holds 200 units of EVERRE 10 ½ Bonds, April 11, 2024 (ISIN: XS19 8204 0641) with a total par value of US$200,000. These were purchased on November 01, 2021 for 50,000 US dollars via the house bank of FMPC Consulting AG and have since been held in custody at SIX Switzerland via the house bank in Liechtenstein. Already on November 10, 2021 an interest payment for this bond was missed.
About DMSA Deutsche Markt Screening Agentur GmbH:
DMSA Deutsche MarktScreening Agentur GmbH is an independent data service that collects and evaluates market-relevant information on companies, products and services. The research house, which has the same owner as FMPC Consulting AG, the Metzler family, sees itself as an advocate for consumers, private customers and private investors. For them, DMSA bundles important and decision-relevant information and prepares it in an easily understandable way. DMSA works with FMPC Consulting AG as needed.
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Source: DMSA Deutsche Markt Screening Agentur GmbH