Chinese Builders Lean on Court for Overhaul as Debt Woes Deepen

(Bloomberg) — China’s distressed developers are increasingly asking local courts to drive their restructuring efforts, as weak home sales continue to weaken their ability to make headway or deliver on private debt workout plans. 

Chongqing Casin Property Development Group Co. late last month became the newest among its peers to apply for the court to overhaul its debt. The move followed a Bloomberg News’ report that defaulter China Fortune Land Development Co. is considering scrapping a creditor-approved debt plan for a court-led solution. Jinke Property Group Co. was the country’s first high-profile, listed delinquent builder to pursue this option.

The expanding list of Chinese developers seeking the court’s help is the latest sign of stress in a property debt crisis that’s entering its fifth year, as private debt talks become protracted and existing restructuring efforts suffer setbacks. While a court-driven process does present an alternative path for distressed firms, its success hinges on key factors including the introduction of cash-rich new investors.

“Court-led restructuring is the last resort for distressed companies,” said Qian Wenhan, partner of Zhong Yin Law Firm, who specializes in restructuring and bankruptcies. “As China’s housing market has yet to notably stabilize and some companies’ debt negotiations become lengthy or even hit an impasse, more developers are expected to use this approach to solve their predicament.”

The trend is also evident across industries as a slowdown in the world’s second-largest economy takes its toll. The number of Chinese listed companies seeking court-led restructuring rose to a six-year high of 29 last year, according to a report by Shanghai-based AllBright Law Offices. Nearly a quarter of them were from real estate or construction firms, it shows.

Court-supervised restructuring for developers in China remains a novelty, despite a record wave of defaults in the industry over recent years. Such an approach generally requires a procedure to place the company under bankruptcy administration, and may include white knights to bring in new funds. 

A growing number of Chinese developers also have ended up in court in Hong Kong since the crisis began, although it was predominantly the offshore creditors that applied to liquidate the defaulters’ business. At least seven such builders, including former industry behemoth China Evergrande Group, has received the court’s so-called winding-up rulings.  

“Court-led restructuring is one of the relatively efficient ways to reduce debt and improve companies’ fundraising efficiencies,” said Luo Yuan, a lawyer at Beijing Docvit Law Firm. “If more developers are able to deliver unfinished projects and slash debt via this approach, it may boost financial institutions’ confidence in issuing special loans to the industry.” 

That said, whether a court will agree to drive a company’s restructuring depends on key conditions such as securing strategic investors who can inject new life into the debt-laden firm.

While the sample pool in China remains too small to meaningfully analyze the impact of court-led restructuring on creditors and investors, the prolonged nature of the debt crisis has lowered the expectations for some. 

“Holders of public bonds can otherwise only live to see corporate assets depreciate over time,” said Ma Suiqing, senior partner and fixed income investment director at Tensor Pacific Co., a Hangzhou-based hedge fund. “That’s why court-led restructuring of developers is clearly beneficial to most bondholders as it at least offers some level of transparency and fairness.”

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