Debt-laden dealmakers eyed by restructuring firms

Chinese deal makers that racked up debts for overseas deals and are now reversing course to pay down borrowings have attracted the attention of restructuring specialists.

As President Xi Jinping steps up leverage curbs, borrowing costs in China have jumped. The nation’s most high-profile deal makers including HNA Group Co. have come under mounting regulatory scrutiny, and have been selling assets as they try to rein in borrowings. HNA missed payments to several Chinese banks and its bond yields have in recent months traded at times at levels that are often considered distressed.

“Chinese companies have been active in overseas acquisitions in recent years and some of their investments have not panned out,” said Damien Whitehead, partner at law firm Ashurst, without naming any specific companies. “Some of these companies are in a tight liquidity situation and their debt may need to be restructured.”

If big Chinese borrowers get into more distress, this could cause a big upswing in restructuring activity, he added.

China’s efforts to deleverage its economy have also made it harder for smaller business to access credit. There has been speculation that trend could intensify after China’s central bank governor Zhou Xiaochuan warned last year that the nation could face the threat of a “Minsky Moment,” referring to a plunge in asset values following unsustainable gains or the exhaustion of credit growth, and named after Hyman Minsky.

There are also a number of banks and funds in China that have invested or lent money offshore, and run into problems, spurring restructuring activity, according to James Dubow, managing director at Alvarez & Marsal Asia Ltd.

A spike in local financing costs in China after a debt market rout last year has added to strains.

“Some of the groups previously took advantage of cheap money onshore to finance acquisitions but with liquidity tightening onshore, they no longer have access to cheap funding,” said Edwin Wong, chief investment officer of Hong Kong-headquartered asset manager SSG Capital Management. Wong also declined to name companies. 

SSG, which was founded by executives who ran Lehman Brothers’ Asia special situations group, raised USD2.5 billion for secured lending and special situations last year, according to Wong. The firm sees rising opportunities from Chinese companies, he said.

Given China’s scale and importance to the region, it is likely to be very closely watched by distressed investors this year, according to Akin Gump Strauss Hauer & Feld LLP.

“If we see a major correction in the Chinese real estate market, that would undoubtedly result in distressed opportunities, given the concentration of Asian high-yield bond issuances in that sector in recent years,” said Naomi Moore, financial restructuring partner at the firm. Bloomberg