Debt-restructuring firm Houlihan bets on more distress in China

HONG KONG – Houlihan Lokey, a US financial services firm that has featured in some of China’s high-profile offshore restructurings, is betting on the country’s US$4.7 trillion (S$6.2 trillion) onshore credit market as a new source of expansion.

Growth in the Asian restructuring business for Houlihan, which has advised on the debt reorganisation of major firms from China Evergrande Group to Luckin Coffee, will largely come from China’s local market in the next six to 18 months, said Mr Brandon Gale, head of Asia restructuring.

Staffing there may double over the next two years from about eight employees currently, he added.

“Right now, most of our business is focused on dollar-denominated bonds in different geographies across the region. But we’re working with Chinese companies on yuan-denominated debt issues as the goal over the next couple of years,” he said at a recent media event. 

Houlihan’s shifting focus towards China’s domestic market follows a period of rapid expansion for global financial advisers in Asia as the country’s property debt crisis unleashed a record wave of offshore defaults.

Gearing up for more local opportunities also reflects the longstanding anticipation that as China’s debt market matures, authorities will allow delinquencies and bankruptcies to become a norm.  

“We’re actively watching spaces like new energy vehicle or electric vehicles given the inundation of supply in the Chinese market,” said Mr Gale.

Ms Sophia Xia, Houlihan’s co-head of China restructuring, said: “Definitely these capital structures may not be sustainable but it’s hard to say how quickly that will actually materialise, depending on the consumption demand and whether export to Europe or the Middle East can help these companies survive.”

Patience is likely key to the success of local adventures for foreign financial advisers such as Houlihan, given China’s onshore corporate debt market has stayed surprisingly uneventful since the pandemic started.

In contrast to its tolerance for surging offshore repayment failures, Beijing has used a combination of tools, from easy monetary policy to encouraging debt swaps or maturity extensions, to maintain domestic financial stability in the past three years. 

However, authorities have repeatedly stressed the need to develop a modern, well-functioning credit market that prices risks accurately and treats defaults as a routine.

Regulators have in recent years launched a campaign to meet that long-term goal, including overhauling China’s notoriously lenient local credit rating industry, improving information disclosure and cracking down on bond issuance irregularities.  

To be sure, the onshore business will be “very different” from Houlihan’s offshore practice, said Mr Gale.

“What we want to build is a China business done in a Chinese way,” he added.

“We’ve thought about branding, we’ve thought about bringing in strategic investors onshore to help. We’re still developing that model, and we may not be a controlling shareholder in that business when all the dust settles, but we’ll see.” BLOOMBERG