Twenty months after it defaulted on its debt and sparked a yearslong real estate crisis in China, China Evergrande Group has finally filed for bankruptcy.
The troubled real estate developer, along with two other related business units, asked a court in New York to grant Chapter 15 bankruptcy protection on Thursday.
The filing is a necessary step in Evergrande’s attempts to restructure its $32 billion in foreign-held debt, and eventually return to normal operations.
Chapter 15 protection lets foreign companies apply for U.S. bankruptcy protections for proceedings that largely happen overseas. If courts approve the plan, U.S. assets of the Chinese company would be protected from creditors trying to dispute the restructuring.
Evergrande had to file for Chapter 15 protections under U.S. law, reports Reuters citing unnamed sources familiar with the subject.
In March, Evergrande announced a restructuring deal that would offer its creditors either new long-term bonds, or a mix of shorter-term bonds and equity-linked instruments.
The equity-linked instruments would be backed by shares in Evergrande, or its property services and electric vehicle units, separately listed in Hong Kong.
Evergrande needs three-quarters of its creditors to endorse the restructuring plan, with hearings held later this month in Hong Kong, the British Virgin Islands, and the Cayman Islands.
Getting that agreement from creditors is critical. Evergrande already faces several lawsuits since it defaulted on its debt in December 2021, including a winding-up petition in Hong Kong which, if successful, would immediately liquidate the company’s assets.
The hearing for that petition is scheduled for Oct. 30, after the results of Evergrande’s restructuring negotiations.
Evergrande did not immediately respond to Fortune’s request for comment. The developer’s bankruptcy lawyers also did not immediately respond to a request for comment made outside U.S. business hours.
Evergrande and China’s real estate crisis
Evergrande defaulted on its offshore debt in December 2021, sparking a liquidity crisis across China’s real estate sector.
The uncertainty dragged down home prices, which put further pressure on struggling developers, putting them at risk of default, too.
Several other private developers have since defaulted on their offshore debt. The most recent developer to come under strain is Country Garden, which missed an interest payment last week and is now warning of a possible $7.6 billion loss in the first half of the year.
Evergrande lost a combined $81 billion over 2021 and 2022. The developer reported $340 billion in liabilities, including $85 billion in short-term borrowing, for the end of 2022. (Evergrande reported both its 2021 and 2022 filings in July, ahead of its debt restructuring hearings.)
Contagion may soon be spreading to other sectors of the economy, including China’s $3 trillion banking sector. Zhongzhi Enterprise Group, a “shadow bank” with $138 billion of assets under management, missed several payments and is reportedly in the process of restructuring its debt.
Home prices continued their decline in July, falling 0.2% compared with June, according to official statistics. Private data suggests even larger declines of at least 15% in major cities like Shanghai, reports Bloomberg.
Even state-owned developers are starting to feel the crunch. Eighteen state-owned businesses warned of losses in the first half of the year, according to a Bloomberg tally, up from 11 last year and just four the year before.
The real estate crisis is weighing on China’s economy as it seeks to recover from the COVID pandemic.
The country is suffering from both low consumer confidence and high youth unemployment, both statistics that Beijing now no longer chooses to release.