- Solar panel producer Suntech announced yesterday
that it had filed an application for provisional liquidation
proceedings in the Cayman Islands;
- This follows bankruptcy filings in China, by a
local subsidiary, and the US;
- The Chinese exacerbating concerns about local
- The filings follow Suntech becoming the first
ChinaCo to default on its US bonds;
- As the bonds are structurally subordinated, under
Chinese law the bondholders do not have recourse to
Suntech’s onshore assets. It is unclear whether
they will be seen as a significant stakeholder in the Chinese
- Although there is a considerable lack of
transparency in the bankruptcy process, lawyers emphasised
that China’s bankruptcy process is new and
US-listed solar panel producer Suntech announced on
Wednesday that it had filed an application for provisional
liquidation proceedings in the Cayman Islands, its jurisdiction
It’s the latest twist in
Suntech’s default and bankruptcy saga, which
should remind investors to adequately price default risk into
future ChinaCo bonds.
In March, Suntech became the first ChinaCo to
default on its bonds. Its Chinese subsidiary Wuxi Suntech
subsequently filed for bankruptcy in China rather than under US
Chapter 11, leaving bondholders to contend with
China’s untested and often unclear bankruptcy
Speaking at a Latham & Watkins seminar on
Wednesday, O’Melveny & Myers’
Mark Fairbairn said that because returns in China are not good,
comparisons would be made between its restructuring process and
Chapter 11. But, he noted that the market in China is finding
its own way of dealing with its problems.
"Speaking from the outside, if you’re
not happy with likely outcomes, re-price your deals on the way
in, rather than thinking about it when it’s too
late," he added.
Chinese bankruptcy and structural
Compared to established restructuring processes
such as the US’s Chapter 11 and the
UK’s scheme of arrangement, China’s
insolvency process is still relatively untested.
The country’s bankruptcy laws were
introduced on a trial basis just 18 years ago in 1995, said
Fairbairn. The enterprise bankruptcy law took effect in 2006
and is an embryonic piece of legislation that has not been
tested fully with either corporates with offshore exposures or
Further, bondholders are structurally subordinated.
Restructuring lawyers have warned investors about ChinaCo
bonds, because they do not have recourse to any onshore
Chinese companies cannot guarantee offshore bonds.
Instead notes are typically issued from a Cayman or BVI
wholly-owned foreign entity. While investors have recourse
against an issuer’s assets outside China, it is
unlikely that international bondholders have any say in an
onshore bankruptcy process.
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Following reports that Suntech was about to default
on its US bonds, its Chinese subsidiary Wuxi Suntech Power filed a petition for the insolvency and
restructuring in the Wuxi Municipal Intermediate
The court appointed an administration committee
comprising local government representatives and accounting and
legal professionals, ostensibly to facilitate an orderly
process for both Wuxi Suntech and its creditors.
"The primary goal is to restructure Wuxi
Suntech’s debt obligations, which continuing
production and operations," said a Suntech press release.
But the local government’s involvement
has raised concerns. Its representative administrator wants to
ensure social stability and employment, said Bingham
McCutchen’s Mark Fucci, and is no doubt mindful of
the 5000 to 6000 employees in his neighbourhood.
"You’re starting out with a process
where this administrator has duties to all creditors and
stakeholders," he said. "One could assume that the agenda of
social harmony and employment is pretty high up on his list of
Fairbairn added that China’s
legislation begins with dealing with creditors’
and debtors’ rights and obligations, but also
focuses on maintaining the socialist market economy.
He noted the presence of a dialogue with the local
governments under other restructuring regimes, citing the US
government’s involvement with Chrysler and General
Motors as an example.
"It’s not surprising that
China’s government is involved in major
restructurings, and that it’s more likely to get
involved because of the infrastructure of its society," he
On October 14, bondholders owning $1.5 million of
Suntech bonds – less than 0.3% of the aggregate
principal amount – filed a petition to put the company
into involuntary bankruptcy protection under Chapter 7 of the
US Bankruptcy Code.
Panelists agreed that bondholders resorted to this
measure upon realising they may not successfully recover in
On October 31 Suntech announced that it would
challenge the Chapter 7 petition and on November 6, it filed an
application for provisional liquidation proceedings in the
Cayman Islands. In a press release, the company also announced that it
would consider pursuing a Chapter 15 filing in the US following
the grant of the application in the Cayman Islands.
In the meantime, Suntech found two strategic
investors: Hong Kong-listed solar company Jiangsu Shunfeng, which was named as the
preferred bidder for Suntech’s Wuxi manufacturing
assets, and Wuxi Guolian Group, which may inject $150 million
to restructure the group.
This process seemed similar to that of the auction
process under section 363(b) of the Bankruptcy Code, which
applies to going concerns. But it did not feature some key
characteristics of that provision, namely an open bidding
environment with a stalking horse.
Fucci said that his guess was that offshore
investors aren’t going to say that this was a
"They’ll feel uncertain about the
selection process and whether this is the best price for the
assets or the best value for creditors and equity holders," he
added. "But let’s face it: is there anywhere in
Asia where creditors say this happens?"
What to expect
While the process seems taxing on bondholders, it
is an important step in learning how to enforce ChinaCo
Investors have said that they wanted to see the
bond structures tested when it really mattered – in a
default situation. Suntech’s default on its $541
million in convertible notes is finally testing these
structures. Its international bondholders’ success
or failure could affect the pricing of ChinaCos’
structurally subordinated bonds in the future.
The judgment of creditors historically may look
harsh, but in the context of what China is trying to do and
what it started from, it is establishing a model, Fucci said.
Concerns of transparency and creditor influence will, however,
eventually have to be dealt with.
Regardless, restructuring lawyers continue to warn
investors about structural subordination. But given the
popularity of Chinese bonds issued by offshore entities, it
seems that these warnings are falling on deaf ears.
Neil McDonald of Hogan Lovells noted that
structural subordination is also an issue in Indonesia and
India. "For someone who works solely in the default space,
these bonds are not adequately priced in terms of risk
weighting," he said.
He added that what strikes him is that investors
don’t fully understand the risks of these
structures and that markets don’t price them
Further, he predicted more defaults ahead. During
the credit squeeze he’s seen significant property
"We can expect a lot of pain for foreign investors
if we see any sort of credit downturn in China," he said.
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