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 Last month, solar producer Baoding Tianwei Baobian Electric became
China's first ever state-owned company to default on a bond coupon
payment, showing Beijing's increasing willingness to let companies
go bust in a bid to reform its corporate market.
Also in April, Kaisa Group became the first Chinese property
developer to fail to pay a coupon on its U.S. dollar bonds and
Internet company Cloud Live Tech Group <002306.SZ> failed to repay
nearly $40 million to bondholders.
Although onshore and offshore bondholders have equal standing in
China's bankruptcy law, lawyers and investors who have experienced
corporate failures in China, say bankruptcy proceedings are subject
to interference from local government officials who rarely
prioritize offshore bondholders.
"The courts can and do exercise wide discretion, and it's not always
clear how that discretion is applied," said Mark Hyde, global head
of the insolvency and restructuring practice at law firm Clifford
Chance in Hong Kong, who advised creditors in the 2014 bankruptcy of
solar producer Chaori, China's first domestic bond default.
"This is in contrast to other jurisdictions like the U.S., where the
key question is whether the legal issues have been satisfied."
Courts also have wide discretion on whether to accept bankruptcy
filings and must work closely with local government officials, who
are generally more concerned about jobs, local tax revenues and
social stability than creditors.
Foreign investors who experienced the bankruptcies of Chaori and
Suntech, another early Chinese corporate failure, felt they were
treated like a nuisance.
"In the case of Suntech there was radio silence from the company for
four months and only when we applied sufficient pressure did they
start to come up with a solution. Creditors are seen as a nuisance,"
said an investor who owned bonds in Suntech but declined to be named
due to the sensitivity of the issue.
INCONSISTENCIES
Even though overseas investors represent a tiny fraction of China
domestic bond ownership, their number is expected to increase as
China moves to open up its corporate bond market, which is the
largest in the world.
Foreign ownership in China's onshore bond market is expected to rise
to 3-4 percent by the end of 2015, from 2.6 percent, according to
Standard Chartered Bank, but the numbers could grow exponentially
once China lifts current investment quotas.
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China's Enterprise Bankruptcy Law, which came into effect only in
2007, incorporates elements of both the U.S. and UK insolvency
regimes, allowing defaulting companies, or their creditors, to file
for bankruptcy in order to restructure the corporate debt or force
the company into liquidation.
But the law is still evolving, giving rise to inconsistencies in its
application, said Daniel Anderson, a partner at law firm Ropes &
Gray, who was involved in the onshore and offshore insolvency
proceedings of Chinese steelmaker FerroChina, which defaulted on its
debt in 2008.
The case of FerroChina, the first high-profile insolvency case
involving a Chinese company, left offshore creditors divided as some
recouped as much as 60 cents to the dollar and others nothing.
As China's slowdown continues, lawyers expect to see an uptick in
bankruptcy filings, but warned that the outcome of these proceedings
would continue to be distorted by political factors.
"We expect to see an increase in defaults and selective corporate
failures," said Jonathan Leitch, a restructuring lawyer at DLA Piper
in Hong Kong.
"Where purely domestic bankruptcies are concerned, the outcome will
continue to be largely pre-arranged at the outset of a bankruptcy
filing."
(Editing by Lisa Jucca)
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