Lehman Lawyer to China Distressed Debt Holders: Expect Pain

  • Commodity price rebound doesn't alter risk factors: Jones Day
  • China has better things to do than tweaking legal system

Investors betting on troubled Chinese companies could be waiting some time for their salvation, according to U.S. law firm Jones Day.

Debts tied to battered commodities and a lack of legal protections for offshore creditors will pose significant challenges for recovery of monies owed, said Jayant W. Tambe, a New York-based partner who is representing Lehman Brothers Holdings Inc. in derivatives lawsuits after its collapse. Clients are still “not so comfortable” about emerging markets even as raw material prices rebound recently from multi-year lows, he said.

“We don’t see a fundamental change in the risk factors, in that there’s still a high level of debt load and there’s still a fair amount of exposure to the commodity cycle,” Tambe said in an interview in Singapore. “We see an increase in defaults through the rest of 2016 in emerging markets.”

China’s credit-rating outlook was last week lowered to negative from stable at Moody’s Investors Service, which highlighted the country’s surging debt burden. Capital is flowing out of the world’s second-largest economy as debt levels climb to an unprecedented 247 percent of gross domestic product. There have been 22 global defaults this year, according to Standard & Poor’s, following a six-year high of 113 in 2015.

First Default

Shenzhen-based Kaisa Group Holdings Ltd. became the first Chinese developer to default on dollar bonds when it missed payments in April 2015. Since then, creditors are also seeking recoveries from companies including coal producers Winsway Enterprises Holdings Ltd. and Hidili Industry International Development Ltd. Legal snags have also dogged China Shanshui Cement Group Ltd. after a default.

“I can’t say if the Chinese legal system will evolve or need to evolve,” Tambe said. “In the current climate, they probably have greater things to address than revamping the legal system for the benefit of foreign investors,” suggesting more pain for bondholders entangled in Chinese debt restructuring cases, he said.

Distressed-debt hedge fund managers posted a 1.7 percent loss in February, a fourth straight month in the red, according to indexes compiled by Eurekahedge Pte. Their cumulative loss over 12 months widened to 8.5 percent, making it the worst-performing among all strategic mandates.

Capital Outflows

Premier Li Keqiang on March 5 announced a 6.5 percent to 7 percent economic expansion goal for 2016 versus a 7 percent objective last year and abandoned its trade target, underscoring the uncertainty about the global outlook as its own economy grew at the slowest pace since 1995.Goldman Sachs Group Inc. said in January there were $550 billion of outflows from China in the second half of 2015. Global funds cut their holdings of local bonds by 61.3 billion yuan ($9.4 billion) in January and February, Chinabond data shows, compared with 22.7 billion yuan of net sales in August when China devalued its currency.

Jones Day advised on 481 mergers and acquisitions announced globally in 2015 worth $218 billion, according to Bloomberg-compiled data. Tambe is co-leader of the firm’s financial institutions litigation and regulation practice.

The law firm represented Asia Pulp & Paper Co. during the 1998 Asian financial crisis in connection with all U.S. securities class action litigation relating to its American Depository Receipts, as well as some $8 billion of bonds sold in the U.S. markets -- then the worst Asian default. It also represented Tech Mahindra Ltd.’s purchase of assets from Satyam Computer Services Ltd. in 2009 and resolving investor litigation in the U.S. and the U.K.

“In Lehman, you have bankruptcy and restructuring proceedings in multiple jurisdictions where there’s, by and large, a fair amount of recognition -- though not always perfect,” Tambe said. “You don’t get the same automatic recognition of foreign proceedings and judgments” in some emerging markets, he said.

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