同时，其他各参与方也在承担越来越大的责任。“政府希望鼓励，在某些情况下甚至会强迫银行和债权人采取更为积极的行动，包括主动对僵尸企业展开行动。也就是说，银行不能总是延长到期日，继续假装一切都好。政府希望资本能够借此重新流入更为健康的经济市场之中，打造更有效且更受市场规则约束的经济体系。”以上是安理国际律师事务所（Allen & Overy，或简写为A&O）“债务重组和追收业务组”顾问律师郑翠苗（Viola Jing）接受ALB采访时表达的看法。
As of 2019, Chinese companies had defaulted on nearly $20 billion in loans, and the country’s default rate is expected to grow further. In the next two years, companies will owe hundreds of billions of dollars in debt that is coming due, with the government also less willing to provide support for such defaults. Lawyers say that China needs to take a balanced approach towards its insolvency and restructuring landscape.
The rapid growth of Chinese companies has led to a surge in borrowing, and companies are under unprecedented financial pressure as the debt is coming due. For example, in late 2019, Tewoo Group Corp failed to repay its $1.25 billion offshore bond, marking the first offshore default by a state-owned enterprise (SOE) in 20 years. The country also saw more defaults by Chinese companies such as CEFC China Energy and HNA Group.
The Chinese government has also changed its practice of “providing support to secure employment” and strengthened market-based measures to regulate the exit mechanism for the companies. “At the national policy level, it is a general trend that the exit mechanism for market entities will follow marketization and rule of law. The ‘Reform Plan on Improving the Exit Mechanism for Market Entities’ issued by 13 agencies including the National Development and Reform Commission and the Supreme People’s Court in July 2019 also reflected this core idea. The fifth portion of the plan mentioned the improvement of the exit mechanism for SOEs,” says Chi Weihong, managing partner at Tiantong & Partners.
“From a legal perspective, the government is never obliged to subsidize SOEs that are facing huge debt or bankruptcy. The government is less willing to help these SOEs for their defaults and is pushing them to the market to let it determine their survival, development or withdrawal,” says Zhu Linhai, senior partner at Allbright Law Offices. “This points to the improvement of the government’s ability to rule the country following the law. It is also an example of optimizing the business environment and adhering to the principles of marketization and rule of law.”
On the other hand, the government intends to make other market entities take more responsibilities. “The government is encouraging and, in some cases, effectively forcing banks and creditors to take more proactive actions, such as to deal with zombie companies. What it means is that banks can no longer extend the maturity date and then continue as if nothing has happened. The rationale behind this is to recycle capital back into a positive economy, and to move towards building a functioning system with more market discipline,” Viola Jing, of counsel in Allen & Overy’s Asian Restructuring & Recovery Group shares with ALB.
THE FIRST TO BE HIT
The dual pressures of debt maturity and changes in government attitudes will inevitably hit the SOEs first. “The SOEs with poor compliance and risk management usually have an ill-founded internal management system, a backward business model, and poor awareness of risk control. They always rely on support from government policies and subsidies. Once the market takes over, these enter-prises will exit the market as they cannot cope well,” Zhu says.
Meanwhile, data shows that listed companies are also struggling. “In 2019, seven listed companies underwent restructuring, hitting another record after 2008,” Chi says. “In addition, nearly 50 listed companies filed for restructuring. Among the Chinese companies, financial institutions and listed companies have the best capability to pay their debts. If many of the listed companies are seeing defaults, entering bankruptcy, and restructuring, it shows that even the most capable companies have exceeded their limits.”
He also noted that this trend is likely to continue in 2020. “More listed companies will undergo restructuring compared to 2019. The new Securities Law, which will come into effect on March 1, stipulates that when a listed company meets the delisting conditions, there will be no longer be a suspension of listing and the company will delist directly. Therefore, listed companies with a debt crisis will have a more urgent need to initiate restructuring,” he adds.
This round of default crisis of the Chinese companies is also poised to create ripple effects for other market entities and even overseas markets.
If the Chinese government intends to increase the sense of responsibility of other market players while fighting the zombie companies, these efforts are paying off. Ian Chapman, co-head of Allen & Overy’s Asian restructuring practice tells ALB: “We have been very focused on the major PRC banks for a number of years, in respect of their onshore as well as offshore exposures, and we have noted that they are responding to the increasing levels of default by building up their workout teams, building up a special asset expertise. It’s an increasingly sophisticated game being played on how these things should be run.”
“Banks are also increasingly seeing the need to be less reactive and to monitor situations as they develop data-bases with watchlists and trackers. This allows them to follow their credit portfolios and track when credits start to deteriorate intending to step in and act when there is still some cash and viable business and still a few more options available to restructure. We’d now say that well over a majority of our Chinese banking clients have experi-ence and know how to guide companies through the situations,” adds Richard Woodworth, fellow practice co-head.
As the Asia-Pacific markets become increasingly interlinked, the impact of this wave of debt restructuring by Chinese companies is not only an issue for domestic market. “We’ve seen the emergence into the global markets of a large number of major Chinese corporates. They’ve got Singapore listings, they got Hong Kong listings. More and more Chinese restructurings now have a very significant offshore element,” Woodworth says. “The development of the legal and regulatory environment in China now gives offshore creditors more opportunities to take direct action against PRC entities and assets. Creditors, whether international banks or PRC banks, onshore or offshore branches, are now more willing and prepared to take direct enforcement action within the PRC,” Jing adds.
LEGAL WORK GROWING
For law firms, this scenario means more restructuring work; it also meant that they are playing a wider role. Zhu cites a case handled by Allbright on behalf of an East China SOE as an example. “The company’s debt ran high as the original legal representative was derelict in his duty and the management was disorganized, which led to a large number of lawsuits. Due to protectionism for SOEs, the shareholders provided guarantees for the company’s debt and fell into heavy debt themselves. Before the East China company filed for bankruptcy, we took a comprehensive look at its assets, liabilities, and litigation,” he says.
“We sought reverse piercing of the corporate veil through judicial auditing, and we tried to recover as many assets as possible through criminal recovery of stolen property,” Zhu adds. “These efforts helped all creditors credit bid their claims after the company moved into bankruptcy proceedings, and the company was able to exit the market legally and efficiently. This demonstrates that legal service providers can play a bigger role,” he says.
In terms of legal work, Zhu says the number of bankruptcy restructuring and liquidation cases has been on a rise since the second half of 2018.
Allen & Overy’s restructuring practice team draw the same conclusion. “And now that there has been this policy shift towards market discipline and allowing defaults, the number of defaults is only going to keep increasing,” Woodworth comments.
Law firms have adopted different strategies to improve their services against this backdrop. “In Asia, it’s still quite often seen as more of a litigation practice. Whereas what we think is it’s a far more holistic practice. The philosophy of our team is that our clients expect Asian based specialist restructuring lawyers like ours who not only understand banking and finance, but also know their way around M&A. Even so, litigation capabilities are essential which is why our team uniquely is an integrated team, and one with a real depth of Chinese language skills – I think you need all these combined skills if you are looking to find the best solution for all stakeholders,” Woodworth continues.
Jing of Allen & Overy notes: “Building on Richard’s comments, in this region, most of our clients accept that it is not easy to engage in a restructuring discussion before a crisis occurs and so they expect advice on enforcement and litigation strategies to push the company to engage in restructuring discussions with them. The client’s expectation is no longer just insolvency litigation expertise or transactional rescheduling or re-papering expertise, but for a team like ours which offers a combined skill set to deal with all of the challenges in a cross-border scenario.”
Chi suggests four criteria to test if a restructuring case is successful. “The first is the outcome, as the court has to approve the restructuring plan. Second is the complexity and the scale of the case. The larger the debt amount or asset size is, the more complex the case is. Third is the influence of the case. Lastly, speed and efficiency are also important considerations,” he says.
He cites the restructuring that Tiantong handled on behalf of listed company Pangda Automobile Trading Co. Ltd. as an example. It generally takes 11 months to complete restructuring in China, but it took only 95 days for the case to be established and approved by the court. In terms of complexity, Pangda’s debt amounted to 24.7 billion yuan, involving negotiations with 164 financial institutions. The group also had around a thousand subsidiaries and 300,000 shareholders. “To be able to close a case under such enormous pres-sure in a short time is a good outcome,” he says.
As more Chinese companies default, law firms hope to provide value-added services in other ways. The most typical is to initiate a dialogue between creditors and the company as early as possible to avoid catastrophic consequences.
Woodworth tells ALB that they have a number of deals where the creditors have been very active in pushing the company for engagement. He shares one example: “There was a fairly high profile Chinese conglomerate and the creditors spotted that the group was likely heading towards difficulties and quickly got organized with a creditors’ committee. They took leadership, put pressure on the debtor group to engage and to work with the committee to find a solution. As a result, they were able to get to a position where the debtor was able to successfully refinance their liabilities with a number of the lenders being comfort-able to continue with the relationship.”
But he also points out: “But one of the key challenges in Mainland China like in Hong Kong is that it can be pretty hard for a creditor to work collaboratively to find solutions, unless the company is willing to engage and recognize it has a problem. In other jurisdictions around the world, there is greater ease to get the problem addressed earlier if there are potential personal liabilities for directors who fail to seek help. At the moment, both Mainland China and Hong Kong are very lenient in this area, which means directors more often than not carry on too far and too long and the banks can only get involved when they’re already at crisis point.”
While agreeing with Woodworth’s observation, Ian Chapman also has a different take on this:” I agree a much higher level of accountability of directors is needed, but I think we also have to be very careful not to get to an over-regulated situation which then stifles the entrepreneurial spirit, which is the engine of growth and innovation in Asia. And it’s a fine balance.”
On the other hand, cross-border factors are driving the development of the legal system. “The ultimate objective of cross-border insolvency is to have a global system. Specifically in Hong Kong and the Mainland, we are seeing increasing judicial collaboration in terms of our systems meshing with cross recognition. You’re seeing Hong Kong arbitration recognition and how this assists on the Mainland in terms of asset preservation orders and the like. And we are seeing very encouraging developments in terms of how the Mainland is in a way driving it. Economics will drive the system,” says Chapman.
With a focus on getting positive results, Allen & Overy calls this practice its Restructuring and Recovery Group, “because that’s what our goal is. It’s a double play on words, but our primary goal is to rehabilitate, to save jobs, and to get the best result for all stakeholders, without destroying businesses. Ironically, the best recoveries are the ones that the market never hears about,” says Chapman.
Tiantong, Allbright and Allen & Overy all say that they are ready to expand their teams in expectations of a steady increase in restructuring business over the next one to two years.
Tiantong plans to expand its restructuring team to 40 members. “As the Bankruptcy Law is applied, the professional requirements for bankruptcy lawyers will increase, especially for administrators. We are also seeing more cases in which the administrators are sued for default in the performance. In addition, bankruptcy lawyers are required to integrate resources and coordinate better. They need to fully understand what the creditors need to provide a solution,” Chi says.
Allbright is also enhancing its competitiveness. Zhu tells ALB that the law firm’s headquarters in Shanghai is one of the first-tier administrators designated by Shanghai High People’s Court to handle corporate bankruptcy cases. Fifteen offices of the law firm are qualified as bankruptcy administrators. Allbright has also established a bankruptcy restructuring and liquidation committee convened by Zhu that manages over 300 bankruptcy legal professionals, and it plans to expand its team in the next two years.
Allen & Overy continues to build its restructuring strengths in Asia. “We have a hub in Hong Kong. We have dedicated resources in Singapore and Jakarta, and at the beginning of this year, we have announced our joint operation with Shanghai Lang Yue Law Firm, as approved by the Shanghai Bureau of Justice. Through this Joint Operation, we can offer our clients service in relation to PRC law. Over the past 12 months our regional restructuring team has doubled in size,” says Chapman.
“Jane Jiang, a partner in our Shanghai office is a founder member of the INSOL Asia committee driving regional development and cross border cooperation in the insolvency space. But there were limitations on the client service that we could offer. In particular, Allen & Overy cannot litigate for clients. In contrast, Allen & Overy working together with Lang Yue will give the clients the full service that they need across all aspects of restructuring and recovery matters,” Woodworth adds.
State-owned borrower infuriates investors with sharp haircuts
(Reuters) - An attempt to restructure three-dollar bonds by China’s Qinghai Provincial Investment Group that will pay bondholders only 40 cents on the dollar is “wickedly designed,” investors have said.
Recently, a subsidiary of Qinghai Provincial Investment and Development Co - which, like QPIG, is controlled by Qinghai’s local government - proposed buying the $850 million worth of bonds at a sharp discount.
Guozhen International Trade Consulting, a unit of QPID, offered to buy $300 million of QPIG bonds due 2020 at 41.19 percent of face value. In addition, Guozhen offered to buy two batches of bonds due 2021 worth a total of $550 million at 36.75 percent of face value.
Du Ying, director of QPID, said on a conference call that if bond investors chose not to accept the offer, their chances of getting money back were slim, because the issuer “is in a difficult operational situation” and the bonds are unsecured.
“This is cheating. This is arbitrage. This practice is extremely wicked, and shameless,” an enraged investor said during the conference call. His call was cut off by the operator.
Another investor raised the same issue, saying the offer involves conflicts of interest, and is “wickedly structured.”
“The whole structure is an act of arbitrage. You’re definitely not a white knight. You’re a black knight,” the investor told the QPID managers. “You’re using financial tricks to harm bond investors. This is damaging capital markets order.”
Du declined to answer the questions directly. He said only that the two companies were unrelated and that QPIG, the bond issuer, is struggling and suffering from liquidity shortage. The conference call was cut short.
The tender offer for QPIG bonds follows the pattern of debt restructuring of another state-owned company, Tewoo Group, in late November.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.