財經觀察 1828 --- Foreigners sweat as Chinese firms teeter

Foreigners sweat as Chinese firms teeter

--- No road map exists in bankruptcy cases; like a Rubik's Cube By Laura Santini and Jonathan Cheng

5 March 2009
The Wall Street Journal Asia       

Hong Kong -- FOREIGN LENDERS who rushed into China in recent years are watching nervously as a number of companies there teeter on the brink of insolvency. Their worry: The nation's bankruptcy laws may leave them with virtually nothing.

Several big Western investors -- Citigroup Inc., hedge-fund manager Citadel Investment Group LLC, Credit Suisse Group and CLSA Capital Partners -- are seeking to get back between $100 million and $200 million in loans extended to a Chinese steel maker, according to people familiar with the matter. While they might recoup some of the money under a restructuring, a liquidation could wipe out the loans, one of these people said.

The company, FerroChina Ltd., a maker of galvanized steel, didn't return phone calls or emails seeking comment.

Investors are also nervously watching China's real-estate markets, where ratings firm Standard & Poor's said this week a number of troubled companies pose default risk.

Meanwhile, holders of $1.2 billion in debt issued by Asia Aluminum Holdings Ltd. are considering a buyback offer that would shave nearly three quarters of the value off their debt, if not more. The Chinese company said Wednesday that bondholders would get less than four cents on the dollar if the offer fails and the company was immediately liquidated.

For lenders doing business in China and contemplating insolvency proceedings, "you don't go there unless you have to," said David Kidd, head of restructuring at the Hong Kong office of U.S. law firm Allen & Overy.

The problem: China offers virtually no road map for overseas investors facing a liquidation or restructuring. A new bankruptcy law went into effect in June 2007 that laid out procedures for companies forced into liquidation. But the courts have yet to indicate how they view claims from foreign investors.

"The key thing is the new law hasn't been tested to any extent," said Tony Stringer, head of corporate debt in Asia-Pacific at Fitch Ratings.

Fitch warned on Wednesday that investors need to pay attention to how bond offerings from China are structured. It cited weak corporate governance at some closely held companies, as well the presence of domestic lenders willing to step in with their own help, knocking foreign debt holders further down the ladder.

China is seen long-term as a booming market for debt investors. According to Thomson Reuters, Chinese companies have issued $2.8 billion in U.S. dollar-denominated corporate bonds since 2005, though issuance dropped last year as the credit crisis worsened and many companies began issuing bonds in the local currency.

Lending in China has taken other forms. In the now-ailing property sector, for example, hedge funds lent capital to private developers in the hopes that these fledgling companies would later sell shares to the public, allowing them to cash out once debt was converted to equity.

But others during the boom times were skeptical. Murky recovery procedures contributed to the small number of leveraged buyout deals done in China over the years. In a management-led buyout three years ago, Asia Aluminum turned to public investors rather than the syndicated-loan groups that typically sponsor leveraged buyouts.

In China, borrowers often pledge shares as collateral in an offshore entity. In return, foreign lenders agree to provide loans that are subordinated to senior credit extended by mainland lenders. But a bankruptcy could leave those collateral shares worthless.

China has managed to avoid major hits from bad loans from real estate and other investments that have hurt Western lenders, and its economy is still growing. Still, a number of companies in weakened industries or dependent on the slowing export market have been hit hard by the global downturn.

Standard & Poor's, in a report this week on potential defaults in China's real-estate industry, said Neo-China Land Group (Holdings) Ltd. presents a 50-50 chance of default in the next six months. The company couldn't be reached Wednesday for comment.

In January, the company missed an interest payment on US$400 million in corporate bonds, though it later repaid bondholders during the 30-day grace period. Although it has about two billion Hong Kong dollars (US$258 million) in cash on hand, the company has two payment obligations that exceed that amount coming up this year, according to S&P.

The situation has made real-estate investors nervous, said David Blumenfeld, a real-estate partner at Paul, Hastings, Janofsky & Walker LLP in Shanghai. With some Chinese developers, he said, "it's a lot like playing a Rubik's Cube -- you move one piece and all the other pieces move. You'd better be an expert player."

On Wednesday, Asia Aluminum said its independent adviser, Evolution Watterson Securities Ltd., found that bondholders would receive 16 cents if the company restructures, while holders of pay-in-kind, or PIK, notes would be able to earn 0.9 cent per dollar. In a liquidation, which the report characterized as a scenario in which the company ceases all operations immediately, bondholders would reap 3.82 cents, with PIK holders getting 0.06 cent per dollar. Under PIK terms, investors allow the company to suspend payments during financially difficult periods, usually in return for higher interest payments.