LONDON / HONG KONG, 13 octobre (Hfrance.fr) - With the (3333.HK) As the default deadline approaches, offshore bond investors in the developer are considering their legal options to protect their investments.
Below are a few factors at play as offshore investors, with some $ 20 billion in Evergrande debt, prepare to do in the face of potential fallout from what could become China Biggest corporate flaw of all time:
EVERGRANDE 'S OFFSHORE BONDS CONTAIN A GUARANTEE FROM THE ISSUER?
Chinese legal rules prevent mainland parent companies from guaranteeing the offshore debt of their subsidiaries without going through a registration processand approval.
To work around this problem, offshore corporate bonds, in many cases, are issued by vehicles at special purpose (SPV) and feature a so-called maintenance structure.
The way many market players have worked around the lack of A guarantee consisted of the use of keepwell deeds - a commitment to the bondholders and the offshore SPV that issues the debt, that the parent company will ensure that the SPV maintains positive net worth and remains solvent.
The keepwell structure emerged in 2012-2013, according to Fitch, who cited data estimating that in 2020 more than 16%, or nearly $ 100 billion, offshore bonds issued by Chinese companies contained keepwell structures.
IS THE KEEPWELL STRUCTURE LEGALLY APPLICABLE?
Chinese courts are generally considered to have a wide discretion to refuse to apply a keepwell, on the basis of public interest.
"The fundamental question before investors is whether the keepwell agreement is enforceable and what difference it can make in the recovery process by failure of the group "said Matthew Chow at S&P Global Ratings.
Test cases for this structure were rare.
Chow cites the case of Peking University Founder Group Co Ltd, where court-appointed directors decided last year that they would not recognize the acts of keepwell of the group the obligations offshore in default of payment.
Mais in a separate case, an offshore bondholder in CEFC Shanghai International Group Limited (CEFC), who filed a claim in Hong Kong against the company for breach of the conservation deed, obtained a default judgment in his favor.
This decision was confirmed last November on the grounds that the execution would not be contrary to the public interest , declares the cabinet d ' Ashurst lawyers. But he notes that a decision might have been different if the proceedings had been challenged.
WHAT ARE THE OTHER OPTIONS?
Given Evergrande 's entrenchment in the Chinese economy, some analysts have expressed doubts about the enthusiasm of Chinese courts to facilitate payment to creditors strangers, potentially at the dicedomestic creditors.
David Billington, restructuring partner at Cleary Gottlieb Steen & Hamilton LLP, said creditors may have other options.
"Instead of enforcing the keepwell itself, bondholders could put the offshore issuing company into liquidation or other liquidation proceedings. 'Insolvency, "said Billington.
This would essentially mean that the creditors take over the SPV and issued the bonds through 'a liquidator, who would then pursue the vehicle's claims against the Chinese parent company.
Such a ruling could improve the outlook for the Chinese court, said Billington said.
"Instead of rendering a judgment requiring payment directly to a group of foreign creditors, the courtChinese would just confirm a promise that a mainland parent company gave to its subsidiary, which it failed to keep. "
However, the nature of the issuers and the invisible hand of the authorities can prove to be a stumbling block, said Karl Clowry, restructuring partner at Addleshaw Goddard in London.
"Evergrande is almost like a quasi-sovereign debt restructuring in which the major stakeholders and the authorities are undoubtedly dictating what needs to be done, although the sponsor is still in place, " ", he declared.
" The Ha nd of the government and the authorities is never far away. "
WHAT ARE THE CHANCES OF OFFSHORE BONDS RECOVERING CASH?
Chinese restructurings are often complicated and hardly standardized, salton S&P. However, when it comes to defaults on dollar obligations, out-of-court restructurings are common and allow creditors some leeway to enter into a different deal than that agreed upon with domestic creditors and within different time frames.
Tewoo The group completed an exchange and takeover bid for its four US dollar bonds in December 2019, while the restructuring of the company's onshore debt was approved about a year later.
Even going through a judicial restructuring doesn't always make for a comfortable reading when it comes to cash recovery rates - which depend on a multitude of factors, from the quality of the assets to the shareholding and the complexity of the group structure.
Based on a review of nearly 50 defaulters undergoing legal restructuring, S&P found that investors recorded an average recovery of 23.7 %.
"Everyone is watching to see how it's going " said a Hong Kong lawyer at a large Western law firm. "The result of this could have an impact on how restructuring will be carried out here in the future. Reporting by Karin Strohecker in London and Scott Murdoch in Hong Kong; Additional reporting by Tom Westbrook in Singapore and Kirstin Ridley in London; Edited by Sumeet Chatterjee and Muralikumar Anantharaman
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