China steps up insolvent company clean-up

HONG KONG • China's effort to cut the burden of insolvent companies weighing on its slowing economy has kicked into higher gear, with a slew of bankruptcy filings that are set to enrich the case history of debt resolutions for bond investors.

Local courts have accepted or plan to accept at least five bankruptcy applications from firms that defaulted on publicly issued bonds since early last month.

That is roughly on a par with the number seen over the previous four years.

The new pace may continue: China's top planning body called on Dec 4 for local officials to clean up the debt of firms with excess production capacity or insolvent balance sheets by 2020.

The bad news is that some bond holders may find they are going to get less back from defaulted issuers than they anticipated. The good news: There is likely to be swifter resolution once court procedures take over from ad hoc workout negotiations. And the process will give both creditors and debtors the chance to gain experience in restructuring obligations, little more than four years after China began embracing the concept of defaults in the world's third-largest bond market.

"Bond holders could face considerable losses after bankruptcy proceedings, but what is more important is that they can learn how to fight for their rights via the legal system, and how to choose among debt proposals," said associate managing director Ivan Chung of Moody's Investors Service in Hong Kong.

As with many things in China, government direction is probably behind the latest development, market players say.

 

China is steadily encouraging a financial system where the pricing of credit bears more relation to the risk of the borrower. The local and central authorities have for decades moved to support - or press creditors to support - troubled companies that could fuel unemployment and social unrest if they collapsed.

"Usually, local governments would allow firms or creditors to file for bankruptcy proceedings only if they couldn't come to any agreement with financial institutions and other creditors after long negotiations," said Chinese law firm Rolmax's Shanghai-based senior partner Chen Sheng.

Some creditors will probably have bigger losses than they expected, he also said. Average recovery rates for unsecured creditors in liquidation cases might be 10 per cent to 15 per cent, he said.

China's bankruptcy law has been in place for more than a decade, though corporate bond defaults in the modern era began only in 2014.

This year, issuers have reneged on payments on a record 103 billion yuan (S$20.5 billion) of local bonds, adding to the need for clear procedures.

Workout plans of only three bond delinquents have been made public after they went through a court restructuring, with Dongbei Special Steel Group perhaps the best known.

"Resorting to bankruptcy proceedings is an effective way for bond holders to protect their interest, although it is time-consuming and the recovery rate is uncertain," said vice-general manager of fixed income Sun Chao of Changjiang Securities in Shanghai.

"No matter if issuers end up being restructured or being liquidated, bond holders can get something back."

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A version of this article appeared in the print edition of The Straits Times on December 18, 2018, with the headline 'China steps up insolvent company clean-up'. Print Edition | Subscribe