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From afar, China Evergrande Group<\/a> had all the makings of a killer distressed-debt trade:\u00a0$19 billion<\/a>\u00a0in defaulted offshore bonds;\u00a0$242 billion<\/a>\u00a0in assets; and a government that appeared determined to prop up the country\u2019s faltering property market. So US and European hedge funds piled into the debt, envisioning big payouts to juice their returns.<\/p>\n What they got instead over the course of the next two years is a harsh lesson in the dangers of trying to bargain with the Communist Party. The talks are now dead \u2014 a Hong Kong court has ordered Evergrande\u2019s\u00a0liquidation<\/a>, and the bonds are nearly worthless, trading in secondary markets at just 1 cent on the dollar.<\/p>\n In the aftermath of the Jan. 29\u00a0wind-up order<\/a>, the biggest in China\u2019s history, key players on both sides of the negotiations paint a Kafkaesque picture of endless micro-managing by unidentified government handlers that was communicated to investors through a mind-numbing maze of channels, only to then be interrupted by months-long gaps in dialogue. The last of those gaps came \u2014 to the shock of creditors \u2014 after the court\u2019s December ruling giving the two sides one\u00a0final chance<\/a>\u00a0to cut a deal.<\/p>\n Bloomberg spoke with more than a dozen people with direct knowledge of the talks for this story. All of them requested anonymity because they weren\u2019t authorized to comment publicly about private conversations.<\/p>\n While global money managers have long known that the Chinese government exerts influence over corporate affairs in ways that are uncommon across the developed world, Evergrande was nonetheless a first-hand education for many of them in just how much authorities will intervene for the sake of political and economic expediency.<\/p>\n The 1-cent-on-the-dollar price on the bonds, they say, sends a warning to investors as other Chinese companies, including Country Garden Holdings<\/a> Co., follow Evergrande into default amid an economic slump that officials have struggled to fix. And the country\u2019s disregard for foreign creditors almost certainly means more of them will get sold for parts.<\/p>\n \u201cInvestors probably did not fully appreciate the risk of state intervention,\u201d said David Knutson, chair of The Credit Roundtable, an organization of investors that works to respond to corporate actions averse to bondholders. \u201cApportioning losses between domestic creditors and foreign creditors will be political.\u201d<\/p>\n Of course, it\u2019s more than just Beijing\u2019s involvement that caused Evergrande\u2019s bonds to crater.\u00a0<\/p>\n The nation\u2019s deepening property-market\u00a0slump<\/a>, a $7 trillion stock rout and a tepid policy\u00a0response<\/a>\u00a0are all weighing on broader sentiment. The fact that the bulk of the company\u2019s\u00a0assets<\/a>\u00a0are either already seized or located not in Hong Kong but mainland China \u2014 potentially out of reach of bondholders including Davidson Kempner Capital Management, King Street Capital Management and Contrarian Capital Management, has also contributed to rock-bottom recovery expectations.<\/p>\n Representatives for Davidson Kempner and King Street declined to comment, while Contrarian Capital didn\u2019t respond to requests seeking comment.<\/p>\n Among the litany of grievances raised by those close to the negotiations, almost all pointed to a lack of clarity over who was calling the shots for Evergrande.<\/p>\n Soon after the company\u2019s 2021 default, a\u00a0risk-management committee<\/a>\u00a0dominated by officials from Evergrande\u2019s home province of Guangdong \u2014 in part made up of company executives and state-affiliated debt managers \u2014 was formed to guide the overhaul. Provincial authorities also\u00a0said<\/a>\u00a0that year that they would send a working group to strengthen internal controls and management of Evergrande.<\/p>\n Over the course of the negotiations, Evergrande representatives would sometimes refer to \u201cGuangzhou\u201d (the capital of Guangdong province) as responsible for vetting virtually all key decisions, yet it remained unclear to creditors which combination of entities or individuals they were alluding to.<\/p>\n Investors and advisers lamented not being fully aware of whose interests were being prioritized in negotiations, nor which layers of government they were dealing with.<\/p>\n The secretive yet omnipresent group never directly interacted with those involved in offshore debt talks, said the people familiar. Their views were relayed to the company\u2019s financial advisers, China International Capital Corp. and Bank of China<\/a> International Holdings, which would then pass information on to bondholders via a convoluted web of communications that consisted of lawyers and advisers both in Hong Kong and the mainland, the people said.<\/p>\n For more on the world of distressed investing, subscribe to The Brink<\/p>\n The group could, and did, veto creditor proposals with minimal explanation, the people added.\u00a0<\/p>\n In one example, it balked at an early offer that would\u2019ve given offshore creditors access to the future income streams generated from Evergrande\u2019s onshore projects. That cash instead was to be preserved for ensuring the delivery of other company projects, the people said. That reasoning wasn\u2019t communicated to investors, who were only told the terms were not acceptable, they added.<\/p>\n Representatives for Evergrande, CICC, BOCI and the Guangdong government didn\u2019t respond to requests seeking comment.<\/p>\n Still, early last year, Evergrande and its creditors were seemingly\u00a0near an agreement<\/a>\u00a0to overhaul the company\u2019s offshore debt load. Its $4.7 billion of dollar bonds due 2025 spiked as high as 11 cents.<\/p>\n But a series of setbacks, including weaker than expected property sales, push back from regulators and the\u00a0detention<\/a>\u00a0of Evergrande billionaire chairman Hui Ka Yan, ultimately torpedoed a deal, fueling further frustration and leading to a significant breakdown in talks, the people said.<\/p>\n In early December, when a Hong Kong court gave Evergrande one last chance to strike a deal, the company\u2019s representatives largely fell silent. Over a month went by before they finally contacted the offshore creditor group again \u2014 via email.<\/p>\n When they did, their proposal shocked bondholders. Not only did it do little to strengthen their offer, it crossed a number of red lines the creditor group thought were clearly laid out, people with knowledge of the situation said.<\/p>\n One key sticking point was the claims of a\u00a0group<\/a>\u00a0of creditors identified as class C, which consists of some state-run banks, according to the people.<\/p>\n\n