(Bloomberg) -- A top arranger for Chinese junk dollar bonds says that a type of filing under the US bankruptcy code will play an important role for China’s distressed developers to restructure debt, buying them time to pay back creditors until markets recover.
About 10 Chinese real estate companies could use so-called schemes of arrangement to restructure debt in a holistic fashion this year, Chen Yi, head of global capital markets at Haitong International Securities Group Ltd., said in an interview. As part of the process they could use Chapter 15 filings to bind the terms in the US, preventing creditors from suing them there.
Chen sees more companies turning to the procedure as distressed debt piles up amid a broader crisis in China’s property sector. At least $736 billion owed to creditors may be at risk of restructuring or a haircut, Bloomberg Intelligence calculates. For banks and brokerages in Hong Kong, debt restructuring revenue has become increasingly important, as they grapple with a slump in underwriting businesses amid a bond issuance drought.
An arcane concept in the world of credit overhauls, a scheme of arrangement is a compromise on debt restructuring between a company and its lenders that can be approved by courts, including in jurisdictions such as the Cayman Islands where some developers have corporate entities. If a foreign court approves the scheme, the debtor may seek orders under Chapter 15 in the US to have it enforced there.
“Schemes of arrangement are painful and frustrating, but it’s necessary as it helps property developers cope with short-term liquidity crunches and lets creditors recover their money longer term,” said Chen. The property sector could recover late this year after the government issues clearer policies to support it, he added.
Schemes of arrangement have traditionally had a negative connotation in the Chinese language. In order to make companies more open to accepting the concept, bank advisers have tweaked the description, conferring the process with a more neutral name that avoids mentioning bankruptcy, Chen said.
Already Haitong has used the process to restructure $780 million of debt at Chinese developer RiseSun Real Estate Development Co., creating a template for similar overhauls to come. RiseSun filed a Chapter 15 petition in February to “recognize the BVI scheme arrangements for its offshore debt exchange.” It was followed by Modern Land China Co. in June.
“Under Chapter 15 everyone could benefit because it provides certainty,” said New York-based Francisco Vazquez, senior counsel focusing on bankruptcy and restructuring at Norton Rose Fulbright. “Creditors would have more certainty knowing that the debt will be restructured in a holistic fashion under a Chinese procedure, without having to worry that other creditors might chip away assets by individual lawsuits in the US.”
Even companies once considered safe are buckling under China’s stringent Covid control measures that have dampened economic growth and home buyer interest.
Defaults hit a record last year that 2022 is expected to surpass. High-profile failures at some of the biggest builders have driven more than $25 billion of delinquencies since January.
Not all creditors might be willing to agree to the procedure, though, as a restructuring package could take years before they can reclaim their money. But for schemes of arrangement in Cayman and BVI, only 75% of creditors in value need to vote in favor to move forward with the arrangement, according to PricewaterhouseCoopers LLP.
If there are a significant number of bondholders who haven’t backed the restructuring proposal, it guards the companies against the risk of creditors pursing litigation in the US, said Andrew Payne, restructuring parter at law firm Linklaters LLP.
For Haitong International itself, the firm is trying to diversify revenue income, hedging the blow from a rout in debt issuance which accounted for about 90% of revenue for the debt capital markets team last year.
Financial firms in Hong Kong have been laying off bankers amid a slowdown in deal flow. But when asked, Chen says that he doesn’t foresee layoffs later this year on the debt capital markets team, which currently has about 30 people.
Debt restructuring revenue now accounts for about half of the team’s revenue, while the rest mostly comes from credit issuance for local government vehicles and state-owned enterprise, Chen said.
Green bond issuance is another revenue contributor. Haitong International completed 14 green and sustainable bond issuances in the first half of this year, with the total fundraising amount exceeding $6 billion.
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