As Evergrande’s default looms, what legal options do offshore creditors have?


A traffic light is seen near the headquarters of the China Evergrande group in Shenzhen, Guangdong province, China on September 26, 2021. REUTERS / Aly Song / File Photo

As the China Evergrande group’s default deadline approaches, the property developer’s offshore bond investors 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 outstanding, prepare to face the potential fallout from what could become the biggest corporate default. Chinese:


Chinese legal rules prevent mainland-incorporated parent companies from guaranteeing the offshore debt of their subsidiaries without going through a registration and approval process.

To get around this problem, offshore corporate bonds, in many cases, are issued by Special Purpose Vehicles (SPVs) and feature a so-called sustaining structure.

Many market players have bypassed the lack of collateral by using deeds of custody – a commitment to the bondholders and the offshore SPV that issues the debt, that the parent company will ensure that the SPV maintains equity. positive and remains solvent.

The keepwell structure emerged in 2012-2013, according to Fitch, who cited data estimating that by 2020 more than 16%, or nearly $ 100 billion, of offshore bonds issued by Chinese companies contained keepwell structures.


Chinese courts are generally considered to have a wide discretion to refuse to apply withholding, based on the public interest.

“The fundamental question for investors is whether the keepwell agreement is enforceable and what difference it can make to the group’s default recovery process,” said Matthew Chow of S&P Global Ratings.

The 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 the group’s offshore bonds in default.

But in another case, an offshore bondholder in CEFC Shanghai International Group Limited (CEFC), which filed a complaint in Hong Kong against the company for breach of the Deed of Conservation, obtained a default judgment in its favor.

This decision was confirmed last November on the grounds that the execution would not be contrary to the public interest, Ashurst law firm said. But she notes that a decision might have been different if the proceedings had been challenged.


Given Evergrande’s entrenchment in the Chinese economy, some analysts have expressed doubts about the enthusiasm of Chinese courts to facilitate payment to foreign creditors, potentially to the detriment of domestic creditors.

David Billington, restructuring partner at Cleary Gottlieb Steen & Hamilton LLP, said creditors may have other options.

“Instead of applying the keepwell itself, bondholders could put the offshore issuing company into liquidation or other insolvency proceedings,” Billington said.

This would essentially mean that the creditors would take over the SPV that issued the bonds through a liquidator, who would then pursue the vehicle’s claims against the Chinese parent company.

Such a decision could improve the outlook for the Chinese court, Billington said.

“Instead of issuing a judgment demanding payment directly to a group of foreign creditors, the Chinese court would simply honor a promise that a mainland parent company gave to its subsidiary, which it broke.”

However, the nature of the issuers and the invisible hand of authorities can prove to be a stumbling block, said Karl Clowry, restructuring partner at Addleshaw Goddard in London.

“Evergrande is almost akin to a quasi-sovereign debt restructuring in that the important stakeholders and the authorities undoubtedly dictate what needs to be done, although the sponsor is still in place,” he said. declared.

“The hand of the government and the authorities is never far away.”


Chinese restructurings are often complicated and difficult to standardize, according to S&P. However, when it comes to defaults on dollar obligations, out-of-court restructurings are common and give creditors some leeway to enter into a different deal than that agreed upon with domestic creditors and within different time frames.

Tewoo The group made an exchange and takeover bid for its four U.S. dollar bonds in December 2019, while the restructuring of the company’s onshore debt was approved approximately 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 ranging from asset quality to equity holdings and complexity of the transaction. group structure.

Based on a review of nearly 50 defaulters subject to judicial restructurings, S&P found that investors had recorded an average recovery of 23.7%.

“Everyone is watching to see how it goes,” said a Hong Kong-based lawyer at a large Western law firm. “The result of this could have an impact on how restructurings are carried out here in the future.”

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