Hong Kong regulator digs deeper hole on Evergrande

Guotai Haitong Securities Co

Yesterday 08:36

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Ka Sing Chan

    HONG KONG, June 18 (Reuters Breakingviews) - Regulators can be as error-prone as markets. Hong Kong's Securities and Futures Commission ignored its own principles by reaching a HK$1 billion ($128 million) settlement with PwC's local unit – auditor of collapsed property group China Evergrande – without securing an admission of liability. It also undermined creditor rights and market integrity by compensating shareholders first. Liquidators tasked with recovering assets from the world's most indebted real estate company are right to challenge the agreement in court.
Though the PwC deal was claimed as a victory in April by the SFC, led by Julia Leung, it is problematic in several ways. Most obviously, it disrupts a well-established hierarchy for who gets paid what when a company is liquidated and there isn't enough money to go around. Creditors go first in line, and shareholders typically walk away from distressed situations with nothing in hand. 
The SFC deal hurts the already bleak prospects of Evergrande's offshore creditors. The developer collapsed under more than $300 billion of liabilities but most of its assets are onshore in mainland China and hard for Hong Kong court-appointed liquidators to reach; as of August last year, recoveries stood at $255 million, including a Monet painting. Bondholders essentially funded Evergrande's dividend largesse to shareholders during its boom years; Chinese regulators found the developer falsified its accounts for at least two years before its 2021 default. 
The SFC agreement is also inconsistent with its own stated direction. In guidance published in June 2023, the SFC said given "the need for public accountability and credible deterrence" it would not generally be in the public interest to resolve disciplinary cases on a “no admission of liability” basis. It noted the threat of overwhelming liability arising from class action lawsuits is not relevant in Hong Kong, where such culture does not exist. That leaves it to liquidators to prove PwC's liability. 
Auditors are not part of the SFC's core remit, but it may have wanted to show its teeth and signal its intention to hold financial gatekeepers more accountable. For its oversight of Evergrande, however, it is too little too late. The SFC allowed the company to resume trading on the stock exchange after it was subject to a winding-up petition. So far, there is no public evidence of the watchdog – nor the liquidators – pursuing the institutions that structured and marketed the bonds. UBS UBSG.S, for instance, acted as bookrunner on no fewer than 10 Evergrande offshore debt issuances, and Guotai Haitong Securities 601211.SS on eight, according to Dealogic.
The liquidator's challenge will determine whether the regulator has overstepped its powers. It is unclear how that will impact their separate attempt to claim $8.4 billion from the PwC group globally. The Evergrande case is extremely messy. The heavy hand of Hong Kong's regulator, however well intentioned, looks misplaced.
Full view will be published shortly.
     
CONTEXT NEWS
China Evergrande’s liquidators are seeking a judicial review of a HK$1 billion ($127.67 million) agreement between the collapsed property group’s auditor, PricewaterhouseCoopers Hong Kong, and the city's regulator, Securities and Futures Commission, to compensate minority shareholders, a court filing signed and dated June 12 showed. The agreement was made without any admission of liability by PwC. 
By circumventing processes that would have put the agreement under judicial oversight, the SFC misapplied its powers, the liquidators said in the filing.
The liquidators said they first became aware of the SFC decision on April 23 when it announced it on its website and added that they filed legal proceedings against the authority after the SFC refused to provide any undertaking not to act on the agreement for a specified period. 
The SFC is proceeding with its plan to compensate minority shareholders of Evergrande, an SFC spokesperson told Breakingviews on June 18. 

(Editing by Una Galani; Production by Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))