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Restructuring – A New Era for Chinese Bonds News

Sunday, September 3rd, 2017 | Economy

The debt restructuring of a steel factory with state participation in the north-east of China has given the investors a lesson: they should not hope for a full repayment in case of a failure.
Bond Investors of Dongbei Special Steel Group Co. agreed this month with a 78 percent debt cut on their papers with a volume of more than 500,000 yuan (63,400 euros) if they opt for a cash settlement. Alternatively, they can choose a conversion of their receivables into shares. Bonds covered by collateral are prioritized for service.
According to Goldman Sachs, it is the first time that investors in China have agreed to a solution with a reduced repayment sum.
"The Dongbei Special Steel case serves as an example of how bondholders should reduce their repayment expectations during restructuring, which would facilitate future solutions," said Derek Lai, Hong Kong's managing director at Deloitte China, who spent almost three decades Experience in restructuring.
Investors face each other
In China's relatively short history of bond failures, rescue packages by local authorities had allowed investors to get relatively uninjured. But this is slowly changing after the central government made clear in a October plan to reduce the debt of companies that it wants a broader introduction of bankruptcy, in addition to the option to exchange bonds in equities.
The first failure to operate a bond coupon in China occurred in 2014 at Shanghai Chaori Solar Energy Science & Technology Co., a solar power plant manufacturer. In total, there have so far been at least 50 publicly issued bonds with a nominal volume of over 40 billion yuan a failure in payments, show data collected by Bloomberg.
If you let Dongbei Special Steel out, Goldman Sachs was either fully paid for all these failures, or a restructuring agreement has not yet been concluded because the investors refuse to accept losses.
State puts banks under pressure
In China, the local governments had in the past tended to exert pressure on state-owned banks, to rescue companies that were called, and to pay out their bond creditors.
"The government, regulatory authorities, and other participants now recognize that creditors with similar rights should receive similar treatment when it comes to restructuring," said Victor Jong, Partner of PricewaterhouseCoopers' Business Recovery Services division in Shanghai. In the past, the bond creditors were expecting a preferential treatment, and they also went on the road to protest.
China's court system is currently undergoing rapid development to meet the increasing downturn. The number of bankruptcy courts rose to 90 at the end of June, compared to just five at the beginning of 2015, official figures show. In the first seven months of the year, according to data, the courts accepted over 4700 restructuring and liquidation cases. Last year there was a record in 5665 accepted cases, an increase of 54 per cent compared to 2015.
"To allow debt and debt restructuring in non-viable companies is necessary to improve the allocation and pricing of bonds," said Kenneth Ho, chief financial analyst Asia at Goldman, in a study this month. Dongbei Special Steel is "an important precedent for helping to pave the way for recognizing and restructuring more struggling bonds."


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