How to Restructure Your Offshore Chinese Debt

Is The Once-Buoyant Property Market Bubble In China About To Burst?

With funding liquidity drying up and slow sales, Chinese developers have been facing challenges on two fronts for the past few years.

Since 2019, the Chinese government has been tightening policies and regulations on both capital investment and credit lending in the real estate sector to cool market prices and reduce systematic credit exposure in this volatile sector. From traditional bank lending to high-interest trust loans, the developers have been finding it harder and more expensive to raise new debts or refinance their existing leverage.

A significant market-driven slowdown in sales velocity as well as involuntary price reductions imposed by the government is hitting the real estate sector’s revenue hard. The combined effect of these factors has resulted in a 38% year-on-year reduction in real estate transactions in the country, leaving developers with massive losses and capital lock up, adding to the already unbearable liquidity pressure.

This was painfully reflected in 2021 when over 400 Chinese developers went into bankruptcy, and top developers missed offshore dollar bond payments in excess of US$1 billion. The situation is only expected to worsen as the sector is facing more than a total of US$100billion in due payments in 2022, with leading developers including Evergrande, Shimao and Kaisa already on the brink of collapse.

Despite the effort made in asking for bailouts and assistance from the government to restore liquidity, actions in the last six to 12 months have shown that the government is not keen to directly intervene as it did in the past and would prefer the private sector to deal with the crisis via market-driven restructurings. Below, we discuss the options available to offshore lenders in the event of a potential debt restructuring.

DEBT RESTRUCTURING IN CHINA: WHAT TO EXPECT

China’s debt restructuring process is still in the early stages of its development. In these situations, the local and provincial governments place social stability as a priority. In other words, if there are insufficient assets to satisfy onshore creditors’ claims, offshore bondholders can expect little to no recovery.

WHAT ACTIONS CAN OFFSHORE CREDITORS TAKE?

Given the complexity of resolving cross-border debt disputes, offshore creditors are often keen to appoint an independent financial adviser (IFA) to help steer the process in the correct direction and maximise returns. The IFA often reports to an elected committee that represents the larger group, and assists with:

  • Fostering co-operation among all stakeholders, both onshore and offshore, to achieve a consensus to move forward
  • Providing tailored reviews and on-going monitoring services to analyse and provide clarity on the situation
  • Assessing the viability of any restructuring proposal put forward by the debtor company
  • Assisting with tailoring a viable restructuring plan that will lead to the greatest prospects of recovery for offshore creditors within the compromise
  • Providing independent advice to offshore creditors of their best cause of action.

WHY APPOINTING A LIQUIDATOR IS AN IMPORTANT STEP IN THE PROCESS

For more advanced-stage or hostile cases, where onshore insolvency proceedings are required, or have already commenced, offshore creditors should immediately appoint liquidators to the offshore issuer. The liquidator will participate in the Chinese operating company’s insolvency proceedings as a creditor of the onshore entity on any intercompany loans or claims the issuer might hold.

Taking swift control of the situation is often key in these situations as it maximises the chances of capturing any recovery via a formal appointment as well as being in the driver’s seat to shape a favourable resolution or implement a scheme of arrangement to side line uncooperative creditors.

HOW CAN PERUN CONSULTANTS HELP YOU?

Perun Consultants has decades of experience in many high-profile insolvency and restructuring appointments and has successfully guided numerous creditors out of complex and prolonged debt resolutions with a clean and favourable exit. We have also leveraged our wins on creditor-led engagements to deliver the same for other counter parties such as distressed borrowers, legal advisors and offshore practitioners.

At Perun, our insolvency team understands the issues our clients are facing and are able to act swiftly and accurately to assess options, plans and to execute an ideal exit.

Please contact us if you would like to speak to a member of our team about how we could help move your business forward in challenging times