Restructuring foreign investments in Chinese companies: more to come
February 2016 | SPOTLIGHT | BANKRUPTCY & RESTRUCTURING
Financier Worldwide Magazine
Western capital market investment in Chinese companies has proliferated over the past decade and should continue. As with any asset class, some investments succeed but some will inevitably require restructuring. Some borrowers will encounter financial difficulties and will need to reschedule and rearrange their funded debt and credit facilities. Accordingly, cross-border restructurings of Chinese companies should increase over the coming years, particularly as a result of recent Chinese liberalisations in cross-border finance.
Over the past several years, the international financial community has witnessed a significant increase in cross-border restructurings of Chinese companies. These restructurings have involved large enterprises with billions of dollars of revenues and indebtedness. The types of companies that have undergone restructuring span several industries, though they have often involved the construction, property and energy industries.
There have been a number of notable cases in recent years.
On 30 March 2012, the Chinese forestry firm Sino-Forest, filed for bankruptcy in Ontario, Canada. In 2011 the company had been accused of inflating its revenues and exaggerating the value of its timber holdings, which caused stock prices to plummet, subsequently restructuring via a debt equity swap through the Canadian CCAA process to transfer ownership to bondholders.
Chinese company Suntech Power Holdings Co, once the world’s largest solar-panel maker, had its subsidiaries placed in bankruptcy proceedings in China in 2013 and filed for Chapter 15 bankruptcy in the Southern District of New York in 2014 after defaulting on $541m of US bonds.
In 2014, LDK Solar Co utilised Cayman Islands and Hong Kong schemes of arrangement, as well as Chapter 11 and Chapter 15 proceedings to restructure its debt. LDK joined Zhejiang Topoint Photovoltaic Co and Suntech Power Holdings Co, both of which filed under Chapter 15 in 2014.
Shenzhen-based property developer Kaisa Group Holdings Ltd missed an interest payment due 8 January 2015 on its $500m of 2020 bonds. After months of negotiations with its lenders it has restored some operations but still faced disputes amounting to $3.4bn as of 10 November 2015.
China Shanshui Cement Group, the huge Chinese cement manufacturer, was the sixth company in 2015 to default on yuan-denominated domestic notes. The company defaulted on a $314m domestic bond due on 12 November 2015, and sought the appointment of provisional liquidators in the Cayman Islands Grand Court, although the Cayman court dismissed this application.
The increase in cross-border financings, and therefore restructurings, is tied to the huge debts that Chinese companies, banks and municipalities have been accumulating since the financial crisis of 2008-2009. According to Bloomberg, China’s debt to GDP ratio climbed to a record high of 207 percent in July 2015. As central banks have held interest rates at record lows and bought up government debt to stabilise the financial system, investors have increasingly turned to corporate debt issued in emerging markets as a source of higher returns. Chinese companies have capitalised on this appetite for foreign investment and have borrowed $377bn from 2010 to 2014, according to the Bank for International Settlements.
A new wave of foreign investment seems just over the horizon now. A recent regulatory shift was promulgated by the People’s Republic of China’s National Development and Reform Commission (NDRC) circular on administration and filing of foreign debt, which came into effect on 14 September 2015. The circular abolishes the old case-by-case approval system for incurrence of foreign debt, with the goal of simplifying the approval and registration process. Significantly, the new regime permits companies to tap the offshore funding market directly, as opposed to issuing debt through offshore affiliates, holding companies or through other special vehicles. The import of this is that foreign investors will now be able more regularly to invest directly into PRC companies and therefore have primary claims to the same entity and assets that local Chinese lenders have, as opposed to suffering the structural subordination that was heretofore the norm. That being said, the new NDRC rule has been the subject of some debate as it makes no distinction between bonds and loans or between PRC companies and foreign subsidiaries of PRC companies. In addition, how the new rule will interact in practice with many other regulations remains to be fleshed out.
Nevertheless, this development will likely be attractive to both PRC issuers and foreign lenders. PRC issuers will have greater financing options and may be able to borrow at lower rates, while foreign lenders will be attracted by the superior quality of the debt instruments. Interestingly, the upshot for future restructurings of those financings that fail will likely be increased coordination between foreign and Chinese lenders, as they will now sit pari passu at the same borrower entity.
The NDRC rule is just the most recent in a series of changes that China’s regime has gone through over the last two years that facilitate cross-border Chinese financing and investment. These have included certain liberalising of the rules for granting Renminbi and foreign currency guarantees for offshore debt, the 2013 launch of the Shanghai Free Trade Zone, the recent admission of the Renminbi to the list of IMF reserve currencies, the debut sale of debt by the People’s Bank of China in London in October 2015, and the relaxation of SAFE rules for the flow of foreign exchange into and out of China.
The anticipated increase in Chinese cross-border finance will, however, require specialised knowledge and skills, both for new investments and restructurings. Not only will financial analysis be needed, but experienced legal and cultural advice will be imperative to navigate successful restructurings. By way of example, the importance of a company within a local area, such as the number of employees and the proportion they form of the local workforce, can be relevant. Government support for a restructuring may be forthcoming where the failure of a significant employer could risk social stability. For the sophisticated and well advised investor, opportunities in cross-border Chinese finance and restructuring are on the rise.
Ronald J. Silverman, Stuart Tait and Allan Wardrop-Szilagyi are partners at Hogan Lovells LLP. Mr Silverman can be contacted on +1 (212) 918 3880 or by email: email@example.com. Mr Tait can be contacted on +852 2840 5048 or by email: firstname.lastname@example.org. Mr Wardrop-Szilagyi can be contacted on +852 2840 5627 or by email: email@example.com.
© Financier Worldwide
Ronald J. Silverman, Stuart Tait and Allan Wardrop-Szilagyi
Hogan Lovells LLP